[Federal Register Volume 85, Number 57 (Tuesday, March 24, 2020)]
[Proposed Rules]
[Pages 16726-16886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03760]
[[Page 16725]]
Vol. 85
Tuesday,
No. 57
March 24, 2020
Part II
Securities and Exchange Commission
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17 CFR Parts 240, 242, and 249
Market Data Infrastructure; Proposed Rule
Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 /
Proposed Rules
[[Page 16726]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240, 242, and 249
[Release No. 34-88216; File No. S7-03-20]
RIN 3235-AM61
Market Data Infrastructure
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing to amend 17 CFR 242, Rules 600 and 603 and to
adopt new Rule 614 of Regulation National Market System (``Regulation
NMS'') under the Securities Exchange Act of 1934 (``Exchange Act'') to
update the national market system for the collection, consolidation,
and dissemination of information with respect to quotations for and
transactions in national market system (``NMS'') stocks (``NMS
information''). Specifically, the Commission proposes to expand the
content of NMS information that is required to be collected,
consolidated, and disseminated as part of the national market system
under Regulation NMS and proposes to amend the method by which such NMS
information is collected, calculated, and disseminated by introducing a
decentralized consolidation model where competing consolidators replace
the exclusive securities information processors.
DATES: Comments should be received on or before May 26, 2020.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File Number S7-03-20 on the subject line.
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-03-20. This file
number should be included on the subject line if email is used. To help
us process and review your comments more efficiently, please use only
one method. The Commission will post all comments on the Commission's
internet website (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549-1090 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any materials will
be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Kelly Riley, Senior Special Counsel,
at (202) 551-6772; Ted Uliassi, Senior Special Counsel, at (202) 551-
6095; Elizabeth C. Badawy, Senior Accountant, at (202) 551-5612; Leigh
Duffy, Special Counsel, at (202) 551-5928; Yvonne Fraticelli, Special
Counsel, at (202) 551-5654; Steve Kuan, Special Counsel, at (202) 551-
5624; or Joshua Nimmo, Attorney-Advisor, at (202) 551-5452, Division of
Trading and Markets, Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing to expand the
content of NMS information that is required to be collected,
consolidated, and disseminated as part of the national market system
under Regulation NMS by proposing several new defined terms under Rule
600 of Regulation NMS, including ``consolidated market data,'' ``core
data,'' ``regulatory data,'' ``administrative data,'' and ``exchange-
specific program data.'' To implement the decentralized consolidation
model, the Commission is proposing to amend Rule 603 under Regulation
NMS to remove the requirement that all consolidated information for
individual NMS stocks be disseminated through a single plan processor
and to require each national securities exchange and national
securities association to make available its NMS information in the
same manner and using the same methods, including all methods of access
and the same format, as the exchange or association makes available any
quotation or transaction information for NMS stocks to any person. In
addition, the Commission is proposing to add new Rule 614 and a new
Form CC to govern the registration and responsibilities of competing
consolidators. Further, the Commission is proposing that the effective
national market system plan(s) for NMS stocks be amended to reflect the
decentralized consolidation model. Finally, the Commission is proposing
to amend Regulation SCI to expand the definition of ``SCI entities'' to
include competing consolidators.
In particular, the Commission is proposing: (1) Amendments to Rule
600 [17 CFR 242.600] to add new definitions of ``administrative data,''
``auction information,'' ``competing consolidator,'' ``consolidated
market data,'' ``core data,'' ``depth of book data,'' ``exchange-
specific program data,'' ``primary listing exchange,'' ``regulatory
data,'' ``round lot,'' and ``self-aggregator;'' (2) amendments to Rule
603 [17 CFR 242.603] to require national securities exchanges and
national securities associations to make available NMS information to
competing consolidators and self-aggregators and to remove the
requirement that all consolidated information for individual NMS stocks
be disseminated through a single plan processor; (3) adoption of Rule
614 [17 CFR 242.614] and Form CC to require registration of competing
consolidators; (4) that the participants to the effective national
market system plan(s) relating to NMS stocks amend such plan(s) to
reflect the definition of ``consolidated market data'' and the
implementation of a decentralized consolidation model; (5) amendments
to Rule 1000 [17 CFR 242.1000] to include competing consolidators in
the definition of ``SCI entities;'' and (6) conforming changes and
updating cross-references in Rule 201(a)(3) [17 CFR 242.201(a)(3)],
Rule 201(b)(1)(ii) [17 CFR 242.201(b)(1)(ii)], Rule 201(b)(3) [17 CFR
242.201(b)(3)], Rule 600(b)(43) [17 CFR 242.600(b)(43)], Rule
600(b)(61) [17 CFR 242.600(b)(61)], and Rule 602 [17 CFR 242.602].
Table of Contents
I. Introduction
II. Current Market Data Infrastructure under Regulation NMS and the
Equity Data Plans
A. Consolidated Market Data and Proprietary Data
B. NMS Regulatory Framework
C. Other Regulatory Data
1. Regulation SHO
2. Limit-Up Limit-Down Plan
3. Market-Wide Circuit Breakers
4. Odd-Lot Transaction Reports and Aggregated Odd-Lot Orders
III. Proposed Enhancements to NMS Information
A. Introduction
B. Proposed Definition of ``Consolidated Market Data''
C. Proposed Definition of ``Core Data''
1. Round Lot Size
[[Page 16727]]
2. Depth of Book Data
3. Auction Information
D. Proposed Definition of ``Regulatory Data''
1. Regulation SHO
2. Limit Up-Limit Down Plan
3. Market-Wide Circuit Breakers
4. Other Regulatory Data
E. Proposed Definition of ``Administrative Data''
F. Proposed Definition of ``Exchange-Specific Program Data''
IV. Need for and Proposed Enhancements to Provision of Consolidated
Market Data
A. Existing Centralized Consolidation Model
B. Proposed Decentralized Consolidation Model
1. Access to Data
2. Competing Consolidators
3. Self-Aggregators
4. Amendment to the Effective National Market System Plan(s) for
NMS Stocks
5. Effects on the National Market System Plan Governing the
Consolidated Audit Trail
6. Transition Period
C. Alternatives to the Centralized Consolidation Model
1. Distributed SIP Alternative
2. Single SIP Alternative
V. Paperwork Reduction Act
A. Summary of Collection of Information
1. Registration Requirements and Form CC
2. Competing Consolidator Duties and Data Collection
3. Recordkeeping
4. Reports and Reviews
5. Amendment to the Effective National Market System Plan(s) for
NMS Stocks
6. Collection and Dissemination of Information by National
Securities Exchanges and National Securities Associations
B. Proposed Use of Information
1. Registration Requirements and Form CC
2. Competing Consolidator Duties and Data Collection
3. Recordkeeping
4. Reports and Reviews
5. Amendment to the Effective National Market System Plan(s) for
NMS Stocks
6. Collection and Dissemination of Information by National
Securities Exchanges and National Securities Associations
C. Respondents
D. Total Annual Reporting and Recordkeeping Burden
1. Registration Requirements and Form CC
2. Competing Consolidator Duties and Data Collection
3. Recordkeeping
4. Reports and Reviews
5. Amendment to the Effective National Market System Plan(s) for
NMS Stocks
6. Collection and Dissemination of Information by National
Securities Exchanges and National Securities Associations
E. Collection of Information is Mandatory
F. Confidentiality
1. Registration Requirements and Form CC
2. Competing Consolidator Duties and Data Collection and
Maintenance
3. Recordkeeping
4. Reports and Reviews
5. Amendment to the Effective National Market System Plan(s) for
NMS Stocks
6. Collection and Dissemination of Information by National
Securities Exchanges and National Securities Associations
G. Revisions to Current Regulation SCI Burden Estimates
H. Request for Comments
VI. Economic Analysis
A. Introduction and Market Failures
1. Introduction
2. Market Failures
B. Baseline
1. Current Regulatory Process for Equity Data Plans and SIP Data
2. Current Process for Collecting, Consolidating, and
Disseminating Market Data
3. Competition Baseline
4. Request for Comments on Baseline
C. Economic Effects of the Rule
1. Core Data and Consolidated Market Data
2. Decentralized Consolidation Model
3. Economic Effects of Form CC
4. Economic Effects From the Interaction of Changes to Core Data
and the Decentralized Consolidation Model
5. Request for Comments on the Economic Effects of the Proposed
Rule
D. Impact on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
4. Request for Comments on Impact on Efficiency, Competition,
and Capital Formation
E. Alternatives
1. Introduce Decentralized Consolidation Model With Additional
Changes in Core Data Definition
2. Introduce Changes in Core Data and Introduce a Distributed
SIP Model
3. Require Competing Consolidators' Fees be Subject to the
Commission's Approval
4. Do Not Extend Regulation SCI to Include Competing
Consolidators
5. Require Competing Consolidators to Submit Form CC in the
EDGAR System Using the Inline XBRL Format
6. Require Competing Consolidators to Submit Monthly Disclosures
in the EDGAR System Using the Inline XBRL Format
7. Prescribing the Format of NMS Information
8. Request for Comments on Alternatives
F. Request for Comments on the Economic Analysis
VII. Consideration of Impact on the Economy
VIII. Regulatory Flexibility Certification
IX. Statutory Authority
I. Introduction
The widespread availability of NMS information \1\ has been an
essential element in the success of the U.S. securities markets.
Congress recognized the importance of market information to the U.S.
securities markets with the enactment of Section 11A of the Exchange
Act. Section 11A(a)(2) of the Exchange Act \2\ directs the Commission,
having due regard for the public interest, the protection of investors,
and the maintenance of fair and orderly markets, to use its authority
under the Exchange Act to facilitate the establishment of a national
market system for securities in accordance with the Congressional
findings and objectives set forth in Section 11A(a)(1) of the Exchange
Act.\3\ Among the findings and objectives in Section 11A(a)(1) are that
``[n]ew data processing and communications techniques create the
opportunity for more efficient and effective market operations'' \4\
and ``[i]t is in the public interest and appropriate for the protection
of investors and the maintenance of fair and orderly markets to assure
. . . the availability to brokers, dealers, and investors of
information with respect to quotations for and transactions in
securities . . . '' \5\
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\1\ See infra Section II.A for a discussion of the NMS
information that is consolidated and disseminated in the U.S.
securities markets.
\2\ 15 U.S.C. 78k-1(a)(2).
\3\ 15 U.S.C. 78k-1(a)(1).
\4\ 15 U.S.C. 78k-1(a)(1)(B).
\5\ 15 U.S.C. 78k-1(a)(1)(C). The Senate Report for the
enactment of Section 11A stated that ``it is critical for those who
trade to have access to accurate, up-to-the-second information as to
the prices at which transactions in particular securities are taking
place (i.e., last sale reports) and the prices at which other
traders have expressed their willingness to buy or sell (i.e.,
quotations).'' S. Rep. No. 94-75 at 8 (1975) (``Senate Report'').
The Senate Report continued that ``[f]or this reason, communications
systems designed to provide automated dissemination of last sale and
quotation information with respect to securities will form the heart
of the national market system.'' Id. at 6.
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As discussed below, the Commission exercised its authority under
Section 11A of the Exchange Act through the adoption of a series of
rules that have been incorporated into Regulation NMS. Those rules
address both the content of, and the means by which, NMS information is
collected, consolidated, and disseminated.\6\ In particular, Section
11A(c)(1)(B) of the Exchange Act authorizes the Commission to prescribe
rules, as necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Exchange Act, that ``assure the prompt, accurate, reliable, and
fair collection, processing, distribution, and publication of
information with respect to quotations for and transactions in such
securities and the fairness and usefulness of the form and content of
such information.'' \7\ Among other
[[Page 16728]]
things, the Commission required the self-regulatory organizations
(``SROs'') to act jointly pursuant to NMS plans \8\ to disseminate,
through a single plan processor, a consolidated national best bid and
national best offer, along with last sale data, for each NMS stock.\9\
While the Commission has periodically revised certain of its NMS rules
with the goal of ensuring that the regulatory framework continues to
fulfill the goals of Section 11A of the Exchange Act,\10\ the
Commission has not significantly updated the rules that govern the
content and distribution of NMS information since their initial
implementation in the late 1970s.
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\6\ See 17 CFR 242.601-603; infra Section II.B.
\7\ See 15 U.S.C. 78k-1(c)(1)(B); Senate Report, supra note 5,
at 189 (``Examples of the types of subjects as to which the SEC
would have the authority to promulgate rules under these provisions
include: The hours of operation of any type or quotation system,
trading halts, what and how information is displayed and
qualifications for the securities to be included on any tape or
within any quotation system.'').
\8\ On January 8, 2020, the Commission issued a notice of
proposed order directing the SROs to submit a new, single NMS plan
for NMS stocks (``New Consolidated Data Plan''). See Securities
Exchange Act Release No. 87906 (Jan. 8, 2020), 85 FR 2164 (Jan. 14,
2020) (``Proposed Governance Order''). The existing NMS plans for
NMS stocks are: (1) The Consolidated Trade Association (``CTA'')
Plan; (2) the Consolidated Quotation (``CQ'') Plan; and (3) the
Nasdaq Unlisted Trading Privileges (``Nasdaq UTP'') Plan
(collectively the ``Equity Data Plans''). See infra note 13 and
Section II.A. The Commission is proposing provisions in new Rule 614
that would require the participants to amend the effective national
market system plan(s) for NMS stocks. See infra Section IV.B.4. If
adopted, the proposed amendments would apply to any effective
national market system plan for NMS stocks. In response to the
Proposed Governance Order, the NYSE submitted a comment letter that
also discussed a number of market structure issues that are
addressed in this release (e.g., expanding SIP data content and
modernizing SIP data delivery such as through a potential competing
consolidator model). See Letter from Elizabeth K. King, Chief
Regulatory Officer, ICE, and General Counsel and Corporate
Secretary, NYSE, to Vanessa Countryman, Secretary, Commission, 5
(Feb. 5, 2020) (``NYSE Governance Letter''). As with various other
comments referenced herein, including, without limitation, comments
received in connection with the Roundtable on Market Data and Market
Access, see infra note 17, the NYSE Governance Letter was not
provided with reference to the specific proposals discussed in this
release. To the extent that the NYSE or other commenters wish to
modify or supplement their prior comments to reflect the particulars
of the proposals discussed herein, the Commission welcomes such
comments.
\9\ See Exchange Act Rule 11Aa3-1 (renumbered and renamed as
Exchange Act Rule 601, Dissemination of transaction reports and last
sale data with respect to transactions in NMS stocks); Exchange Act
Rule 11Ac1-1 (renumbered and renamed as Exchange Act Rule 602,
Dissemination of quotations in NMS securities); Exchange Act Rule
11Ac1-2 (renumbered and renamed as Exchange Act Rule 603,
Distribution, consolidation, and display of information with respect
to quotations for and transactions in NMS stocks.).
\10\ See, e.g., Securities Exchange Act Release Nos. 51808 (June
9, 2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting
Release''); 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018)
(adopting amendments to Rule 606 to require additional disclosures
by broker-dealers to customers regarding the handling of their
orders).
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The widespread availability of timely market information promotes
fair and efficient markets and facilitates the ability of brokers and
dealers to provide best execution to their customers.\11\ The structure
of the equity markets has changed dramatically since the Commission
adopted the rules now known as Regulation NMS in 2005 and approved the
three existing Equity Data Plans under Rule 608 \12\ of Regulation
NMS.\13\ In 2005, a substantial amount of trading was conducted on
relatively slow manual markets, and for any given stock, concentrated
on its listing exchange. Today, the U.S. equity markets have evolved
into high-speed, latency-sensitive electronic markets where trading is
dispersed among a wide range of competing market centers \14\ and even
small degrees of latency affect trading strategies.\15\ Sophisticated
order routing algorithms dependent on low-latency, high-quality market
information are widely used to execute securities transactions.\16\
Despite the evolution of latency-sensitive markets, the provision of
NMS information that is centrally consolidated and disseminated by the
Equity Data Plans is meaningfully slower than certain proprietary
market data products distributed by the exchanges.\17\ Today, the
exchanges sell
[[Page 16729]]
proprietary data products that are fast, low-latency products designed
for automated trading systems and include content, such as depth of
book \18\ and order imbalance information for opening and closing
auctions (``proprietary DOB products'') that are not provided under the
Equity Data Plans.\19\ The Commission believes that the content and
operating model under which NMS information is collected, consolidated,
and disseminated have not kept pace with technological and market
developments and are no longer satisfying the needs of many investors.
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\11\ Section 11A(a)(1) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1). See also Senate Report supra note 5, at 8; Securities
Exchange Act Release No. 42208 (Dec. 9, 1999), 64 FR 70613, 70614
(Dec. 17, 1999) (``Market Information Concept Release''); Concept
Release on Equity Market Structure, Securities Exchange Act Release
No. 61358 (Jan. 14, 2010), 75 FR 3593, 3600 (Jan. 21, 2010)
(``Equity Market Structure Concept Release'').
\12\ 17 CFR 242.608.
\13\ The Equity Data Plans are effective national market system
plans as defined in Rule 600(b)(22) for NMS stocks. See Second
Restatement of the Plan Submitted to the Securities and Exchange
Commission Pursuant to Rule 11Aa3-1 under the Securities Exchange
Act of 1934, composite as of Dec. 6, 2019, available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTA_Plan_Composite_as_of_December_6_2019.pdf; Restatement of Plan
Submitted to the Securities and Exchange Commission Pursuant to Rule
11Ac1-1 under the Securities Exchange Act of 1934, composite as of
Dec. 6, 2019, available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CQ_Plan_Composite_as_of_December_6_2019.pdf; Joint Self-Regulatory
Organization Plan Governing the Collection, Consolidation and
Dissemination of Quotation and Transaction Information for Nasdaq-
listed Securities Traded on Exchanges on an Unlisted Trading
Privilege Basis, available at http://www.utpplan.com/DOC/Nasdaq-UTPPlan_after_46th_Amendment-Excluding_21st_36th_38th_42nd_44th_45th_Amendments.pdf; Proposed
Governance Order, supra note 8.
\14\ Rule 600(b)(38) defines a market center as ``any exchange
market maker, OTC market maker, alternative trading system, national
securities exchange, or national securities association.'' 17 CFR
242.600(b)(38).
\15\ See Eric Budish, et al., Will the Market Fix the Market? A
Theory of Stock Exchange Competition and Innovation, University of
Chicago, Becker Friedman Institute for Economics Working Paper No.
2019-72 (May 2019), available at SSRN: https://ssrn.com/abstract=3391461; Andriy Shkilko and Konstantin Sokolov, Every Cloud
Has a Silver Lining: Fast Trading, Microwave Connectivity and
Trading Costs (Apr. 2019), available at https://ssrn.com/abstract=2848562; Equity Market Structure Concept Release, supra
note 11 (``NYSE-listed stocks were traded primarily on the floor of
the NYSE in a manual fashion until October 2006. At that time, NYSE
began to offer fully automated access to its displayed
quotations.''). In contrast to NYSE, stocks on the Nasdaq Stock
Market LLC (``Nasdaq'') traded in a highly automated fashion at many
different trading centers following the introduction of SuperMontage
in 2002. See Securities Exchange Act Release No. 46429 (Aug. 29,
2002), 67 FR 56862 (Sept. 5, 2002); Steven Quirk, Senior Vice
President, Trader Group, TD Ameritrade, Testimony before the U.S.
Senate Committee on Homeland Security and Governmental Affairs,
Permanent Subcommittee on Investigations, Hearing on ``Conflicts of
Interest, Investor Loss of Confidence, and High Speed Trading in
U.S. Stock Markets'' (June 17, 2014), available at https://www.hsgac.senate.gov/imo/media/doc/STMT%20-%20Quirk%20-%20TD%20Ameritrade%20(June%2017%202014).pdf%20 (citing statistics
that average execution speed has improved by 90% since 2004--from 7
seconds to 0.7 seconds in 2014). Today, trading speed is measured in
microseconds and is moving towards nanoseconds. See, e.g., Vera
Sprothen, Trading Tech Accelerates Toward Speed of Light, Wall
Street Journal (Aug. 8, 2016), available at https://www.wsj.com/articles/trading-tech-accelerates-toward-speed-of-light-1470559173;
Alexander Osipovich, NYSE Aims to Speed Up Trading With Core Tech
Upgrade, Wall Street Journal (Aug. 5, 2019), available at https://www.wsj.com/articles/nyse-aims-to-speed-up-trading-with-core-tech-upgrade-11565002800.
\16\ See, e.g., Equity Market Structure Concept Release, supra
note 11; Eric Budish, et al., supra note 15; Andrew Morgan, The
impact of high frequency trading on algorithms and smart order
routing, Algorithmic Trading & Smart Order Routing, 3d. ed. (2009),
available at https://pdfs.semanticscholar.org/ba0b/5e952b27cc48513825cb7e4f6d15803e6973.pdf.
\17\ See infra Section II.A. In addition, as discussed more
fully below, on October 25-26, 2018, the Division of Trading and
Markets hosted roundtables to gather information on market data and
market access. See generally Equity Market Structure Roundtables,
Oct. 25-26, 2018: Roundtable on Market Data and Market Access,
https://www.sec.gov/spotlight/equity-market-structure-roundtables
(``Roundtable''). Transcripts for both days of the Roundtable are
available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/roundtable-market-data-market-access-102518-transcript.pdf (``Roundtable Day One Transcript'') and https://www.sec.gov/spotlight/equity-market-structure-roundtables/roundtable-market-data-market-access-102618-transcript.pdf
(``Roundtable Day Two Transcript''). Panelists at the Roundtable
noted that the geographical delays inherent in the nature of a
centralized processor results in significant latencies between the
Equity Data Plans' feeds and proprietary data feeds that cannot be
eliminated in the current infrastructure. Roundtable Day One
Transcript at 145 (Simon Emrich, Norges Bank Investment Management)
(``And part of that, the most interesting part of the delay for me
is really the location of the consolidator, the geographical delay
that's introduced, and the data connection element to the
consolidator. Right? So from our perspective, the latency of the
consolidator itself, the consolidation engine, the improvements that
we've made are remarkable over the years. But it just doesn't
measure the physical reality of the brokers that we're using.'');
148 (Michael Blaugrund, NYSE) (``[T]he method of transmission of
that information and the timing of the aggregation of that
information into a consolidated feed plays a role. As I think we all
acknowledge, the aggregation time has improved dramatically. As
we've seen that decline, it highlights the fact that the geographic
latency becomes a more meaningful portion of the overall time
line.''). See also Ivy Schmerken, Speeding Up the SIP Isn't Enough,
Say Market Pros at Baruch Conference, InformationWeek: Wall Street &
Technology (Oct. 17, 2014), available at http://www.wallstreetandtech.com/infrastructure/speeding-up-the-sip-isnt-enough-say-market-pros-at-baruch-conference/d/d-id/1316724.html
(``Since the SIP is slower than proprietary data feeds that firms
can obtain directly from exchanges, critics have said that the SIP
enables `latency arbitrage' between high-speed traders using fast
data and those trading off of stale quotes from the consolidated
feed.'').
\18\ ``Depth of book,'' or ``DOB,'' refers to open buy and sell
orders resting on a limit order book at prices away from the top of
book (i.e., orders to buy at prices that are below the best bid and
orders to sell that are higher than the best offer).
\19\ See, e.g., Nasdaq, Data Products, available at http://www.nasdaqtrader.com/Trader.aspx?id=DPSpecs (last accessed Jan. 7,
2020) (describing low-latency DOB data products); NYSE, Real-Time
Data, available at https://www.nyse.com/market-data/real-time (last
accessed Jan. 7, 2020) (describing low-latency DOB data products);
Cboe, Market Data Services: U.S. Equities, available at https://markets.cboe.com/us/equities/market_data_services/ (last accessed
Jan. 7, 2020) (describing low-latency DOB data products).
Particularly when aggregated, proprietary DOB market data products
provide a consolidated view of the market with greater content and
lower latency. The exchanges also sell other data products that are
limited in content, such as an exchange's top of book (``TOB'')
quotation information and transaction information, that are designed
largely for the non-automated segment of the market (e.g., retail
investors and wealth managers) that is less sensitive to latency
(``proprietary TOB products''). Examples of such proprietary TOB
products include NYSE BBO (https://www.nyse.com/market-data/real-time/bbo), NASDAQ Basic (https://business.nasdaq.com/intel/GIS/nasdaq-basic.html), and Cboe One Feed (https://markets.cboe.com/us/equities/market_data_services/cboe_one). NYSE BBO provides TOB data.
Nasdaq Basic and Cboe One's Summary Feed provide TOB and last sale
information. Nasdaq Basic also provides Nasdaq Opening and Closing
Prices and other information, including Emergency Market Condition
event messages, System Status, and trading halt information. Cboe
One, however, also offers a Premium Feed that includes DOB data.
Each of these products is sold separately by the relevant exchange
group. See Letter from Matthew J. Billings, Managing Director,
Market Data Strategy, TD Ameritrade, 5-8 (Oct. 24, 2018) (``TD
Ameritrade Letter''), available at https://www.sec.gov/comments/4-729/4729-4560068-176205.pdf (stating that the lower cost of exchange
TOB products, coupled with costs associated with the process to
differentiate between retail professionals and non-professionals
imposed by the Equity Data Plans, and associated audit risk, favors
retail broker-dealer use of exchange TOB products).
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Today, the dissemination of NMS information relies upon a
centralized consolidation model, where the SROs provide certain NMS
information for each NMS stock to an exclusive processor (``exclusive
SIP'').\20\ The exclusive SIP then consolidates this NMS information
and makes it available to market participants.\21\ Market participants
also may independently consolidate NMS information by purchasing
individual exchange proprietary market data products \22\ and
consolidating that information for their own use, or obtain NMS
information that has been consolidated by a vendor that provides a data
aggregation service. As discussed further below, proprietary DOB
products collected through this decentralized consolidation model
typically contain enhanced information compared to the market
information provided through the Equity Data Plans, such as information
about all orders on an individual exchange's order book.\23\ Market
participants also are able to consolidate and use the data obtained in
this manner more quickly than market participants relying on NMS
information provided through the Equity Data Plans.
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\20\ An ``exclusive processor'' is defined in Section
3(a)(22)(B) of the Exchange Act as ``any [SIP] or [SRO] which,
directly or indirectly, engages on an exclusive basis on behalf of
any national securities exchange or registered securities
association, or any national securities exchange or registered
securities association which engages on an exclusive basis on its
own behalf, in collecting, processing, or preparing for distribution
or publication any information with respect to (i) transactions or
quotations on or effected or made by means of any facility of such
exchange or (ii) quotations distributed or published by means of any
electronic system operated or controlled by such association.'' 15
U.S.C. 78c(a)(22)(B). A securities information processor (``SIP'')
is defined in Section 3(a)(22)(A) of the Exchange Act as ``any
person engaged in the business of (i) collecting, processing, or
preparing for distribution or publication, or assisting,
participating in, or coordinating the distribution or publication
of, information with respect to transactions in or quotations for
any security (other than an exempted security) or (ii) distributing
or publishing (whether by means of a ticker tape, a communications
network, a terminal display device, or otherwise) on a current and
continuing basis, information with respect to such transactions or
quotations.'' 15 U.S.C. 78c(a)(22)(A). See infra note 42 and
accompanying text.
\21\ See Rule 603(b) of Regulation NMS. Rule 603(b) provides
that all information for an individual NMS stock must be
disseminated through a single plan processor. 17 CFR 242.603(b). See
Rule 600(b)(59), which defines a plan processor as ``any self-
regulatory organization or securities information processor acting
as an exclusive processor in connection with the development,
implementation and/or operation of any facility contemplated by an
effective national market system plan.'' 17 CFR 242.600(b)(59).
\22\ See infra Section II.A (discussing proprietary DOB and
proprietary TOB).
\23\ See supra note 19.
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As noted above, Section 11A of the Exchange Act specifically
highlights the importance of making information with respect to
quotations for and transactions in securities available to brokers,
dealers, and investors in a prompt, accurate, reliable, and fair manner
and directs the Commission to act in accordance with this finding.
Accordingly, the Commission proposes to amend Regulation NMS to better
achieve the goal of assuring ``the availability to brokers, dealers and
investors of information with respect to quotations for and
transactions in securities'' \24\ that is prompt, accurate, reliable,
and fair.\25\ The Commission preliminarily believes that the proposals
described herein would promote fair and efficient markets and would
facilitate the best execution of investor orders, and reduce
information asymmetries between market participants who currently rely
on market data provided through the exclusive SIPs and those who
purchase the proprietary market data products offered by the national
securities exchanges.\26\
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\24\ Section 11A(a)(1)(C)(iii), 15 U.S.C. 78k-1(a)(1)(C)(iii).
\25\ Section 11A(c)(1)(B), 15 U.S.C. 78k-1(c)(1)(B). Section
11A(c)(1)(B) provides the Commission with the authority to prescribe
rules and regulations as necessary or appropriate in the public
interest, for the protection of investors or otherwise in
furtherance of the purposes of the Exchange Act to ``assure the
prompt, accurate, reliable, and fair collection, processing,
distribution, and publication of information with respect to
quotations for and transactions in such securities and the fairness
and usefulness of the form and content of such information.'' Id.
\26\ See Section 11A(a)(1)(C), 15 U.S.C. 78k-1(a)(1)(C) (stating
that it is in the public interest and appropriate for the protection
of investors and the maintenance of fair and orderly markets to
assure ``fair competition among brokers and dealers,'' ``the
availability to brokers, dealers, and investors of information with
respect to quotations for and transactions in securities,'' and
``the practicability of brokers executing investors' orders in the
best market'').
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The proposed amendments include two key parts, and the Commission
preliminarily believes that the proposals are complementary, but can be
independently justified. First, the amendments would update the content
of the information with respect to quotations for and transactions in
NMS stocks that must be made available under Regulation NMS. In
particular, the Commission proposes to expand the NMS information that
is required to be collected, consolidated, and
[[Page 16730]]
disseminated under Regulation NMS to include: (1) Information about
orders in sizes smaller than the current round lot size for certain
higher priced stocks; \27\ (2) information about certain orders that
are outside of the best bid and best offer (i.e., certain depth of book
data); and (3) information about orders that are participating in
opening, closing, and other auctions. The Commission preliminarily
believes that enhancing the content of NMS information in this manner
should help ensure that all market participants have ready access to
that market information in order to facilitate participation in today's
markets.
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\27\ See proposed Rule 600(b)(81) (defining ``round lot'' as 100
shares, 20 shares, 10 shares, 2 shares, or 1 share depending upon
the prior calendar month's average closing price for each NMS
stock).
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Second, the amendments introduce a decentralized consolidation
model whereby competing consolidators would assume responsibility for
the collection, consolidation, and dissemination functions currently
performed by the exclusive SIPs.\28\ To facilitate this decentralized
consolidation model, the Commission proposes that each SRO would be
required to make all of its market data that is necessary to generate
consolidated market data (as proposed to be defined) directly available
to two new categories of entities: (1) Competing consolidators and (2)
self-aggregators. Competing consolidators would be either SROs or SIPs
registered with the Commission pursuant to proposed Rule 614, and would
be responsible for collecting, consolidating, and disseminating
consolidated market data to the public. Self-aggregators would be
brokers or dealers that elect to collect and generate consolidated
market data for their own internal use.
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\28\ The Commission is proposing to include competing
consolidators in the definition of ``SCI entities;'' therefore,
competing consolidators would be subject to the requirements of
Regulation SCI. See Rule 1000(a) of Regulation SCI, 17 CFR
242.1000(a). See Securities Exchange Act Release No. 73639 (Nov. 19,
2014), 79 FR 72252 (Dec. 5, 2014) (``Regulation SCI Adopting
Release''). See also infra Section IV.B.2(f).
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Non-SRO competing consolidators would be required to register with
the Commission.\29\ All competing consolidators, SRO and non-SRO, would
be subject to appropriate standards with respect to the promptness,
accuracy, reliability, and fairness of their consolidated market data
distribution. While self-aggregators would not be subject to a separate
registration requirement, as registered broker-dealers, they would be
subject to the full broker-dealer regulatory regime.\30\ To support
this proposed decentralized consolidation model, each SRO would be
required to make all of its own data that is necessary to generate
consolidated market data available to competing consolidators and self-
aggregators directly from its data center, and in the same manner and
using the same methods, including all methods of access and the same
format, as it makes its proprietary market data products available to
any market participant.
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\29\ As discussed further below, only those entities that are
SIPs would be required to register with the Commission pursuant to
proposed Rule 614 and proposed Form CC. SROs that wish to act as
competing consolidators would not be required to register pursuant
to proposed Rule 614 and proposed Form CC but would be required to
comply with the competing consolidator obligations set forth in
proposed Rule 614(d). See infra Section IV.B.
\30\ See infra Section IV.B.3.
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Under the proposed structure, the effective national market system
plan(s) would continue to serve an important role in the national
market system by, among other things, governing the SROs' provision of
the data necessary to generate consolidated market data, including
setting fees for the provision of such SRO data to competing
consolidators and self-aggregators.\31\ The Commission preliminarily
believes that, by introducing competition and market forces into the
collection, consolidation, and dissemination process, the decentralized
consolidation model would help ensure that consolidated market data is
delivered to market participants in a more timely, efficient, and cost-
effective manner than the current centralized consolidation model.\32\
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\31\ See Proposed Governance Order, supra note 8.
\32\ See infra Section IV.B.
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II. Current Market Data Infrastructure Under Regulation NMS and the
Equity Data Plans
A. Consolidated Market Data and Proprietary Data
Today, in accordance with the centralized consolidation model, the
SROs act jointly pursuant to the three Equity Data Plans to collect,
consolidate, and publicly disseminate real-time, NMS information.\33\
For each NMS stock, the SROs are required, pursuant to Regulation NMS
and the Equity Data Plans, to provide certain quotation \34\ and
transaction \35\ data to the designated exclusive SIP for each Equity
Data Plan.\36\ Each exclusive SIP collects, consolidates, and
disseminates NMS information to the public on the consolidated tape,
described below. The NMS information that is consolidated and made
available under the Equity Data Plans generally includes: ``(1) The
price, size, and exchange of the last sale; (2) each exchange's current
highest bid and lowest offer, and the shares available at those prices;
and (3) the national best bid and offer (i.e., the highest bid and
lowest offer currently available on any exchange).'' \37\ In general,
these data elements form what historically has commonly been referred
to as ``core data.''
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\33\ See supra note 13.
\34\ See Rule 602 of Regulation NMS, 17 CFR 242.602.
\35\ See Rule 601 of Regulation NMS, 17 CFR 242.601.
\36\ Rule 603(b) of Regulation NMS provides that ``the
dissemination of all consolidated information for an individual NMS
stock'' shall be through a single plan processor (i.e., exclusive
SIP). 17 CFR 242.603(b).
\37\ See In the Matter of the Application of Bloomberg L.P.,
Securities Exchange Act Release No. 83755 at 3 (July 31, 2018)
(``Bloomberg Decision''), available at https://www.sec.gov/litigation/opinions/2018/34-83755.pdf; accord In the Matter of the
Application of Sec. Indus. & Fin. Markets Ass'n for Review of Action
Taken by Nyse Arca, Inc., & Nasdaq Stock Mkt. LLC, Securities
Exchange Act Release No. 84432 (Oct. 16, 2018) (``In the Matter of
the Application of SIFMA'') (citing NetCoalition v. SEC., 615 F.3d
525, 529 (DC Cir. 2010)); Securities Exchange Act Release No. 87193
(Oct. 1, 2019), 84 FR 54794, 54795 (Oct. 11, 2019) (``Effective on
Filing Proposal'').
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In addition to disseminating core data, the exclusive SIPs collect,
calculate, and disseminate certain regulatory data, including
information required by the NMS Plan to Address Extraordinary Market
Volatility (``LULD Plan''),\38\ information relating to regulatory
halts and market-wide circuit breakers (``MWCBs''),\39\ and information
regarding short sale circuit breakers pursuant to Rule 201.\40\ The
exclusive SIPs also collect and disseminate other NMS stock data and
disseminate certain administrative messages.\41\ For purposes
[[Page 16731]]
of this release, these existing market data elements, together with the
historical ``core data'' described above, are referred to as ``SIP
data.''
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\38\ See Securities Exchange Act Release Nos. 85623 (Apr. 11,
2019), 84 FR 16086 (Apr. 17, 2019) (approving LULD Plan on a
permanent basis); 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012)
(approving LULD Plan, as modified by Amendment No. 1, on a pilot
basis); Limit Up Limit Down Plan: Overview, available at http://www.luldplan.com/index.html (last accessed Dec. 16, 2019).
\39\ See Securities Exchange Act Release No. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
\40\ See Rule 201(b)(3) of Regulation SHO, 17 CFR 242.201(b)(3).
\41\ The exclusive SIPs also provide other data regarding NMS
stocks pursuant to SRO rules that are described in the Equity Data
Plans' technical specifications, such as data relating to retail
liquidity programs, market and settlement conditions, and the
financial condition of the issuer. In addition, the Nasdaq UTP SIP
separately provides Over-the-Counter Bulletin Board (``OTCBB'')
data, and the CTA Plan allows participants to use the CTA/CQ SIP to
disseminate last sale prices for corporate bonds and information
about indices.
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The Equity Data Plans set the terms for the operation of the
exclusive SIPs.\42\ There are two exclusive SIPs, each of which is
physically located in a different data center. The exclusive SIP for
the CTA and CQ Plans, which covers Tape A (i.e., securities listed on
the New York Stock Exchange (``NYSE'')) and Tape B (i.e., securities
listed on exchanges other than NYSE or Nasdaq),\43\ is located in
Mahwah, New Jersey (``CTA/CQ SIP''), while the Nasdaq UTP Plan
exclusive SIP, which covers Tape C (i.e., Nasdaq-listed securities), is
located in Carteret, New Jersey (``Nasdaq UTP SIP''). Tapes A, B, and C
are commonly referred to as the ``consolidated tapes.''
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\42\ See supra note 20. The exclusive SIPs are the plan
processors for the Equity Data Plans. The Securities Industry
Automation Corporation (``SIAC''), a wholly owned, indirect
subsidiary of Intercontinental Exchange (``ICE''), of which the NYSE
is also a subsidiary, is the plan processor for Tapes A and B;
Nasdaq is the plan processor for Tape C.
\43\ Tape B includes securities listed on exchanges other than
NYSE or Nasdaq, including Cboe, NYSE Arca, and NYSE American.
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The exchanges' primary data centers are in four different physical
locations, namely Mahwah, Carteret, Secaucus, and Weehawken, New
Jersey, and they all have back-up data centers in Chicago.\44\ Broker-
dealers may report transactions effected otherwise than on an exchange
(i.e., ``over-the-counter'' or ``OTC'') to trade reporting facilities
(``TRFs''), which are facilities of FINRA. There are currently three
active TRFs: FINRA/Nasdaq TRF in Carteret, FINRA/Nasdaq TRF in Chicago,
and FINRA/NYSE TRF in Mahwah.\45\
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\44\ See NYSE Trader Update: NYSE and NYSE MKT Equity Emergency
Procedures and New DR Plans (Sept. 9, 2016), available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_and_NYSE_MKT_DR_Trader_Update_Final.pdf; UTP Plan
Administration Data Policies (Oct. 2018), available at http://www.utpplan.com/DOC/Datapolicies.pdf; NYSE Chicago Disaster Recovery
FAQs (July 2019), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-chicago/NYSE_Chicago_Disaster_Recovery_FAQs.pdf; Cboe:
US Equities/Options Connectivity Manual, Version 10.0.0 (Oct. 7,
2019), available at https://cdn.cboe.com/resources/membership/US_Equities_Options_Connectivity_Manual.pdf; Securities Exchange Act
Release No. 78101 (June 17, 2016), 81 FR 41142, 41154 (June 23,
2016).
\45\ See FINRA, Trade Reporting Facility (TRF), available at
https://www.finra.org/filing-reporting/trade-reporting-facility-trf
(last accessed Jan. 22, 2020). As of October 2019, the FINRA/Nasdaq
TRF in Carteret handled approximately 30% of the share volume in OTC
reported transactions. See Cboe Global Markets, U.S. Equities Market
Volume Summary (month-to-date), available at https://markets.cboe.com/us/equities/market_share/ (last accessed Oct. 21,
2019).
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With this centralized consolidation model, each exchange and FINRA
must first transmit its quotation and transaction information \46\ from
its own data center to the appropriate exclusive SIP's data center for
consolidation, at which point SIP data is then further transmitted to
market data end-users, which are often located in other data centers.
The SROs today typically transmit their market data through fiber optic
cables to the exclusive SIPs and, in the case of the CTA/CQ SIP,
through infrastructure owned and mandated by the NYSE.\47\
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\46\ See supra notes 34-35 and accompanying text.
\47\ The NYSE operates the CTA/CQ SIP and has required that
access to the CTA/CQ SIP be through the use of the NYSE's IP local
area network. The NYSE represents that this access requirement was
mandated due to the IP network's security, resiliency, and
redundancy. See Securities Exchange Act Release No. 86865 (Sept. 4,
2019), 84 FR 47592, 47594, n.12 (Sept. 10, 2019) (``NYSE Low-Latency
SIP Filing''). See also Consolidated Tape System (CTS) Participant
Input Binary Specification, 60, available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_INPUT_SPECIFICATION.pdf, and Consolidated Quotation
System (CQS) Participant Input Binary Specification, 42, available
at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CQS_BINARY_INPUT_SPECIFICATION.pdf (both depicting that the
participants of those plans use ICE Data Services' Secure Financial
Transaction Infrastructure (``SFTI'') network to transmit data to
those exclusive SIPs). SFTI provides connectivity to the individual
ICE and NYSE Group markets including NYSE and NYSE Arca equities.
SFTI also provides connectivity to the data center for the CTA and
CQ Plans in Mahwah.
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In addition to the provision of SIP data pursuant to the Equity
Data Plans, the national securities exchanges separately sell their
individual proprietary market data products, which include the SIP data
elements as well as a variety of additional data elements.\48\ As noted
above, the proprietary DOB products are generally characterized as
fast, low-latency products designed for automated trading systems that
include additional content.\49\ In addition to SIP data, proprietary
DOB products typically include odd-lot quotations; orders at prices
above and below the best prices (i.e., depth of book data); and
information about orders participating in auctions, including auction
order imbalances.\50\
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\48\ In adopting Regulation NMS in 2005, the Commission
determined not to require that DOB information be included in core
data, reasoning that investors who needed DOB information would be
able to obtain such information from markets or third-party vendors.
See Regulation NMS Adopting Release, supra note 10, at 37567. In
making that determination, the Commission stated that this would be
``a competition-driven outcome [that] would benefit investors and
the markets in general.'' See id. at 37530.
\49\ In contrast, proprietary TOB products are generally limited
in content, such as the exchange's top of book quotation information
and transaction information and are designed largely for the non-
automated segment of the market (e.g., retail or non-professional
investors and wealth managers that access market data visually). But
see CBOE One Feed Specification, CBOE, available at https://cdn.cboe.com/resources/membership/Cboe_US_Equities_Cboe_One_Feed_Specification.pdf (highlighting that
CBOE offers a non-automated product with a five-level depth of book
option).
\50\ See, e.g., Nasdaq TotalView and NYSE Integrated.
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In addition to proprietary DOB products, the exchanges offer a
variety of connectivity options, such as co-location at primary data
centers, fiber optic connectivity, wireless connectivity, and point-of-
presence connectivity at third-party data centers.\51\ Typically, the
data for proprietary DOB products is transmitted directly from each
exchange to the data center of the subscriber, where the subscriber's
broker-dealer or vendor (or the subscriber itself) privately may
consolidate such data with the proprietary data of the other exchanges.
Furthermore, for many market participants, proprietary data is
transmitted using wireless connectivity (often provided by the
exchanges), such as microwave or laser technology,\52\ that allows
faster data transmission than the fiber optic cables that are typically
used by the exclusive SIPs for the purposes of transmitting SIP data.
The exchanges charge fees for these proprietary data products,\53\ as
well as for each of their connectivity options for co-location (e.g.,
physical ports, cross-connects, and field programmable gate array
(``FPGA'') services) and for communications services providing
connectivity between data centers (e.g., microwave and fiber optics).
In the context of the Division of Trading and Markets' Roundtable on
Market Data and Market Access in October 2018, some market participants
commented that, in their view, they need the more content-rich
proprietary data feeds and low latency connectivity to provide best
execution to their clients
[[Page 16732]]
and to competitively participate in the markets.\54\
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\51\ The exchanges have an inherent competitive advantage in the
provision of connectivity services within exchange facilities, while
connectivity options made available elsewhere, such as point-of-
presence connectivity at third-party data centers, are fully
competitive.
\52\ See, e.g., Nasdaq, Trade Management Services: Wireless
Connectivity Suite, available at http://n.nasdaq.com/WirelessConnectivitySuite (last accessed Dec. 16, 2019); ICE Global
Network, New Jersey Metro, available at https://www.theice.com/market-data/connectivity-and-feeds/wireless/new-jersey-metro (last
accessed Dec. 16, 2019).
\53\ See, e.g., Letter to Vanessa Countryman, Secretary,
Commission, from Robert Toomey, Managing Director and Associate
General Counsel, SIFMA, 1-2 (Jan. 13, 2020) (stating that exchange
market data products are ``complementary'' and result in ``not only
supra-competitive prices, but supra-monopoly prices'').
\54\ See, e.g., Roundtable Day One Transcript at 27 (Doug Cifu,
Virtu Financial). See also Sections III.C.1(c), III.C.2(c), and
III.C.3(b).
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B. NMS Regulatory Framework
The Commission exercised its authority under Section 11A of the
Exchange Act to facilitate the collection, consolidation, and
dissemination of NMS information primarily by adopting five rules under
Regulation NMS.\55\
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\55\ See also supra Section I (discussing Section 11A of the
Exchange Act).
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Rule 601 of Regulation NMS governs the dissemination of transaction
reports \56\ and last sale data \57\ with respect to transactions in
NMS stocks. In particular, Rule 601 requires each national securities
exchange and association to file a transaction reporting plan with the
Commission that, among other things, must specify the manner of
collecting, processing, sequencing, making available, and disseminating
transaction reports and last sale data.\58\
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\56\ Rule 600(b)(84) defines a transaction report as ``a report
containing the price and volume associated with a transaction
involving the purchase or sale of one or more round lots of a
security.'' 17 CFR 242.600(b)(84).
\57\ Rule 600(b)(34) defines last sale data as ``any price or
volume data associated with a transaction.'' 17 CFR 242.600(b)(34).
\58\ 17 CFR 242.601(a)(2).
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Rule 602 of Regulation NMS governs the dissemination of quotations
in NMS securities. Specifically, under Rule 602 each national
securities exchange and association is required to collect, process,
and make available certain quotation data to vendors,\59\ including the
best bid, best offer,\60\ quotation sizes,\61\ and aggregate quotation
sizes.\62\
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\59\ Rule 600(b)(87) defines a vendor as ``any securities
information processor engaged in the business of disseminating
transaction reports, last sale data, or quotations with respect to
NMS securities to brokers, dealers, or investors on a real-time or
other current and continuing basis, whether through an electronic
communications network, moving ticker, or interrogation device.'' 17
CFR 242.600(b)(87).
\60\ Rule 600(b)(8) defines best bid and best offer as ``the
highest priced bid and the lowest priced offer.'' 17 CFR
242.600(b)(8).
\61\ Under Rule 600(b)(67), quotation size, ``when used with
respect to a responsible broker's or dealer's bid or offer for an
NMS security, means: (i) [T]he number of shares (or units of
trading) of that security which such responsible broker or dealer
has specified, for purposes of dissemination to vendors, that it is
willing to buy at the bid price or sell at the offer price
comprising its bid or offer, as either principle or agent; or (ii)
[i]n the event such responsible broker or dealer has not so
specified, a normal unit of trading for that NMS security.'' 17 CFR
242.600(b)(67).
\62\ Rule 600(b)(2) defines aggregate quotation size as ``the
sum of the quotation sizes of all responsible brokers or dealers who
have communicated on any national securities exchange bids or offers
for an NMS security at the same price.'' 17 CFR 242.600(b)(2).
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Rule 603 of Regulation NMS governs the distribution, consolidation,
and display of information with respect to quotations for and
transactions in NMS stocks. Specifically, Rule 603(a)(1) requires any
exclusive processor,\63\ or any broker or dealer with respect to
information for which it is the exclusive source, that distributes
information with respect to quotations for or transactions in an NMS
stock to a securities information processor \64\ to do so on terms that
are fair and reasonable. Rule 603(a)(2) requires any national
securities exchange, national securities association, broker, or dealer
that distributes information with respect to quotations for or
transactions in an NMS stock to a securities information processor,
broker, dealer, or other persons to do so on terms that are not
unreasonably discriminatory.\65\
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\63\ See supra note 20.
\64\ Id.
\65\ See 17 CFR 242.603(a)(2). Proprietary data cannot be made
available sooner than current core data is transmitted to the
exclusive SIPs. See Regulation NMS Adopting Release, supra note 10,
at 37567 (``[I]ndependently distributed data could not be made
available on a more timely basis than core data is made available to
a Network processor. Stated another way, adopted Rule 603(a)
prohibits an SRO or broker-dealer from transmitting data to a vendor
or user any sooner than it transmits the data to a Network
processor.'').
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Rule 603(b) requires each national securities exchange and
association to act jointly pursuant to one or more NMS plans to
disseminate consolidated information, including an NBBO,\66\ on
quotations for and transactions in NMS stocks.\67\ Further, the rule
states that such plan or plans shall provide for the dissemination of
all consolidated information for an individual NMS stock through a
single plan processor.
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\66\ Rule 600(b)(43) defines national best bid and national best
offer (``NBBO'') as ``with respect to quotations for an NMS
security, the best bid and best offer for such security that are
calculated and disseminated on a current and continuing basis by a
plan processor pursuant to an effective national market system plan
. . .'' 17 CFR 242.600(b)(43).
\67\ 17 CFR 242.603(b).
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Rule 608 of Regulation NMS governs the procedures for the filing
and Commission approval of NMS plans and plan amendments. The
Commission approved the Equity Data Plans under Rule 608. Finally, Rule
609 of Regulation NMS governs the registration of exclusive SIPs.
C. Other Regulatory Data
As noted above, certain regulatory data is required--pursuant to
Commission and exchange rules and NMS plans--to be generated by primary
listing exchanges and the exclusive SIPs and included in the current
SIP data. The availability of this data is critical to allowing market
participants to understand when and where permissible trading may
occur.
1. Regulation SHO
Rule 201(b)(1)(i) of Regulation SHO \68\ requires a trading center
\69\ to establish, maintain, and enforce written policies and
procedures reasonably designed to prevent the execution or display of a
short sale order of a covered security \70\ at a price that is less
than or equal to the current national best bid,\71\ if the price of
that covered security decreases by 10% or more from the covered
security's closing price, as determined by the listing market \72\ for
the covered security as of the end of regular trading hours \73\ on the
prior day (the ``Short Sale Circuit Breaker''). The rule requires that
the trading center impose the Short Sale Circuit Breaker for the
remainder of the day and the following day when a national best bid for
the covered security is calculated and disseminated on a current and
continuing basis by a ``plan processor'' \74\ pursuant to an effective
national market system plan.\75\
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\68\ 17 CFR 242.201(b)(1)(i).
\69\ Rule 201(a)(9) states the term trading center shall have
the same meaning as in 242.600(b)(82). 17 CFR 242.201(a)(9).
\70\ Rule 201(a)(1) states the term covered security shall mean
any NMS stock as defined in 242.600(b)(48). 17 CFR 242.201(a)(1).
\71\ Rule 201(a)(4) states the term national best bid shall have
the same meaning as in 242.600(b)(43). 17 CFR 242.201(a)(4).
\72\ Rule 201(a)(3) states the term listing market shall have
the same meaning as the term ``listing market'' as defined in the
effective transaction reporting plan for the covered security. Rule
201(a)(2) states the term effective transaction reporting plan for a
covered security shall have the same meaning as in 242.600(b)(23).
17 CFR 242.201(a)(2)-(3).
\73\ Rule 201(a)(7) states the term regular trading hours shall
have the same meaning as in 242.600(b)(68). 17 CFR 242.201(a)(7).
\74\ Rule 201(a)(6) states the term plan processor shall have
the same meaning as in 242.600(b)(59). 17 CFR 242.201(a)(6).
\75\ Rule 201(c) provides an exception for a broker-dealer that
has adopted and enforces its own such policies and procedures. More
specifically, if such broker-dealer identifies a short sale order as
being at a price above the current national best bid at the time of
submission, such broker-dealer may mark the order as ``short
exempt.'' However, such broker-dealer must establish, maintain, and
enforce written policies and procedures reasonably designed to
prevent incorrect identification of orders for purposes of the
``short exempt'' exception. Policies and procedures designed to
create the appearance of technical compliance with Rule 201 but
which otherwise are designed to circumvent, or assist others in
circumventing, the Rule, would not be compliant. For example, any
arrangement between market participants in which the execution price
appears to be compliant with the Short Sale Circuit Breaker, but
also includes a post-trade payment (i.e., fee, commission, or other
payment) that effectively renders the execution price non-compliant
with the Short Sale Circuit Breaker, would not be consistent with
the Rule's requirements. Further, in the Adopting Release for Rule
201, the Commission stated that, ``any conduct by trading centers,
or other market participants, that facilitates short sales in
violation of Rule 201 could also lead to liability for aiding and
abetting or causing a violation of Regulation SHO, as well as
potential liability under the anti-fraud and anti-manipulation
provisions of the Federal securities laws, including Sections 9(a),
10(b), and 15(c) of the Exchange Act, and Rule 10b-5 thereunder.''
Securities Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR
11232, 11260 (Mar. 10, 2010).
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[[Page 16733]]
Rule 201(b)(3) of Regulation SHO provides that the determination
regarding whether the Short Sale Circuit Breaker has been triggered
shall be made by the listing market for the covered security, and, if
the Short Sale Circuit Breaker has been triggered, the listing market
shall immediately notify the ``single plan processor'' (i.e., the
exclusive SIP responsible for consolidation of information for the
covered security pursuant to Section 242.603(b)). The exclusive SIP
must then disseminate this information.
2. Limit-Up Limit-Down Plan
The LULD Plan \76\ sets forth procedures that provide for market-
wide limit up-limit down (``LULD'') requirements to prevent trades in
individual NMS stocks from occurring outside of specified price bands
and reduce the negative impacts of extraordinary volatility in NMS
stocks caused by momentary gaps in liquidity or erroneous trades. These
price bands are coupled with the provision of trading pauses to
accommodate more fundamental price moves.
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\76\ See Securities Exchange Act Release Nos. 85623, supra note
38; 67091, supra note 38.
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Under the LULD Plan, the applicable exclusive SIP for an NMS stock
is required to perform certain key functions, including: (1)
Calculating the applicable price bands,\77\ (2) disseminating flags
identifying quotes that are not executable,\78\ (3) disseminating flags
identifying quotes that are in a ``limit state,'' \79\ (4)
disseminating trading pause messages received from the primary listing
exchanges,\80\ and (5) disseminating reopening auction information from
the primary listing exchanges.\81\
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\77\ During regular trading hours for an NMS stock, the
exclusive SIP for that stock uses a reference price, which it also
calculates, to calculate and disseminate to the public a lower and
upper price band. The reference price for each NMS stock equals the
arithmetic mean price of eligible reported transactions for the NMS
stock over the immediately preceding five-minute period (see LULD
Plan Section V(A)(1)) and must remain in effect for at least 30
seconds. See LULD Plan Section V(A)(2). The exclusive SIP calculates
a pro-forma reference price on a continuous basis during regular
trading hours, and when that price has moved by 1% or more from the
reference price currently in effect, the pro-forma reference price
becomes the reference price, and the plan processor disseminates new
price bands based on the new reference price. See LULD Plan Section
V(A)(2). The price bands for an NMS stock are calculated by applying
the appropriate percentage parameter for the stock, specified by the
LULD Plan, to the stock's reference price, with the lower price band
as a percentage parameter below the reference price and the upper
price band as a percentage parameter above the reference price. See
LULD Plan Section V(A)(1).
\78\ When a national best bid is below the lower price band or a
national best offer is above the upper price band for an NMS stock,
the exclusive SIP is required to disseminate the national best bid
or national best offer with an appropriate flag identifying it as
non-executable. See LULD Plan Section VI(A)(2).
\79\ When a national best bid is equal to the lower price band
or a national best offer is equal to the upper price band for an NMS
stock, the exclusive SIP is required to distribute the national best
bid or national best offer with an appropriate flag identifying it
as a ``Limit State Quotation.'' See id.; LULD Plan Section VI(B)(2).
\80\ If trading for an NMS stock does not exit a limit state
within 15 seconds of entry during regular trading hours, then the
primary listing exchange is required to declare a trading pause in
that NMS stock and notify the exclusive SIP. See LULD Plan Section
VII(A)(1). The exclusive SIP is required to disseminate trading
pause information to the public. See LULD Plan Section VII(A)(3).
\81\ Five minutes after declaring a trading pause for an NMS
stock, if the primary listing exchange has not declared a regulatory
halt, the primary listing exchange is required to attempt to reopen
trading using its established reopening procedures. The exclusive
SIP publishes the following information that the primary listing
exchange provides to the exclusive SIP in connection with such
reopening: Auction reference price; auction collars; and number of
extensions to the reopening auction. See LULD Plan Section
VII(B)(1). In addition, the applicable exclusive SIP for an NMS
stock is required to receive and disseminate to the public
information from primary listing exchanges regarding their inability
to reopen trading due to a systems or technology issue.
Specifically, the primary listing exchange is required to notify the
exclusive SIP if it is unable to reopen trading in an NMS stock due
to a systems or technology issue and if it has not declared a
regulatory halt. The exclusive SIP is required to disseminate this
information to the public. See LULD Plan Section VII(B)(2).
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3. Market-Wide Circuit Breakers
All of the equity exchanges and FINRA have adopted uniform rules,
on a pilot basis, relating to MWCBs.\82\ The purpose of an MWCB is to
address extraordinary market-wide volatility by halting trading across
the markets when price declines reach certain specified levels.\83\
These levels are reached when the S&P 500 Index declines a specified
percentage from the prior day's closing price. Currently, there are
three thresholds: 7% (Level 1), 13% (Level 2), and 20% (Level 3). A
Level 1 or Level 2 market decline after 9:30 a.m. ET and before 3:25
p.m. ET would halt the equity and options markets for 15 minutes, while
Level 1 and 2 declines at or after 3:25 p.m. ET would not halt trading.
A Level 3 market decline at any time during the trading day would halt
equity and options trading until the primary listing exchange opens the
next trading day.
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\82\ See supra note 39.
\83\ Id.
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The primary listing exchanges and the exclusive SIPs work together
to implement the MWCB rules. The CTA/CQ SIP monitors the S&P 500 Index
throughout the trading day and would send a message to the primary
listing exchanges and the Nasdaq UTP SIP in the event a Level 1, Level
2, or Level 3 circuit breaker was triggered. Upon receipt of such a
message, the applicable primary listing exchange would impose a
regulatory halt by sending the appropriate message to the applicable
exclusive SIP, which would then disseminate the regulatory halt message
to market participants. Trade resumption messages would be generated at
the appropriate time by the primary listing exchange and similarly
disseminated to market participants through the applicable exclusive
SIP.
4. Odd-Lot Transaction Reports and Aggregated Odd-Lot Orders
As discussed further below, while Regulation NMS only requires NMS
stock quotation and transaction data in round lots to be reported to
the exclusive SIPs, SRO rules and the Equity Data Plans include some
odd-lot information in the SIP data.\84\ Pursuant to exchange rules,
odd-lot quotations that, when aggregated, equal or exceed a round lot
are reported to the exclusive SIPs as round lots.\85\ Moreover, the
Equity Data Plans were amended in 2013 to include odd-lot transaction
reports in the SIP data.\86\
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\84\ See infra Section III.C.1.
\85\ See infra notes 159-160 and accompanying text.
\86\ See infra notes 160-161 and accompanying text.
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III. Proposed Enhancements to NMS Information
A. Introduction
The Commission is proposing to expand the content of the NMS
information that would be required to be collected, consolidated, and
disseminated under the rules of the national market system to better
meet the needs of today's investors and other market participants.
Specifically, the Commission proposes to amend Regulation NMS by
introducing, in Rule 600, new defined terms for ``consolidated market
data,'' ``core data,'' ``regulatory data,'' ``administrative data,''
``exchange-specific program data,'' ``round lot,'' ``depth of book
data,'' and ``auction information'' and by amending the current
definitions of ``national best bid and national best offer'' and
``protected
[[Page 16734]]
bid or protected offer.'' The Commission preliminarily believes that
these amendments will enhance the availability and usefulness of the
NMS information that is required to be provided under the rules of the
national market system for a wide variety of market participants. The
Commission also preliminarily believes that expanding the content of
NMS information would help to reduce information asymmetries between
market participants who rely upon current SIP data and those who
purchase proprietary data feeds from the national securities
exchanges.\87\
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\87\ See supra note 26.
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The Commission's objectives in expanding and modernizing the
content of NMS information that would be collected, consolidated, and
disseminated under the rules of the national market system reflect that
different market participants and different trading applications have
different needs for NMS information. For example, the needs of some
retail investors that visually consume NMS information (e.g., humans
looking at quotes on a screen) differ from those of institutional
trading systems that electronically consume NMS information (e.g.,
algorithmic trading systems or smart order routers (``SORs'').\88\ This
proposal to expand and modernize the content of NMS information is not
intended solely to meet the needs of a narrow segment of the NMS
information market; rather, the proposal is intended to address the
needs of a broad cross-section of market participants.\89\ The
Commission intends for the NMS information to promote both fair and
efficient markets, be useful to a broad cross-section of market
participants, reduce information asymmetries, and facilitate best
execution.\90\
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\88\ SORs employ the use of algorithms (e.g., by broker-dealers
on behalf of a client) designed to optimally send parts of an order
(child orders) to various market centers (e.g., exchange and ATSs)
so as to optimally access market liquidity while minimizing
execution costs.
\89\ This proposal is also not designed to expand the content of
NMS information to meet all needs of all market participants; the
proprietary data market, which includes information that is not
included in the proposed definition of core data, is expected to
continue to fulfill additional needs beyond those that are met by
the proposed definition of core data.
\90\ While this proposal is intended to facilitate best
execution, the Commission is not specifying minimum data elements
needed to achieve best execution.
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B. Proposed Definition of ``Consolidated Market Data''
The Commission is proposing to amend Rule 600(b) to add a
definition of ``consolidated market data'' that would include
information that is currently disseminated by the exclusive SIPs as
well as additional new information. Specifically, under proposed Rule
600(b)(19), consolidated market data would be defined as the following
data, consolidated across all national securities exchanges and
national securities associations: (1) Core data; (2) regulatory data;
(3) administrative data; (4) exchange-specific program data; and (5)
additional regulatory, administrative, or exchange-specific program
data elements defined as such pursuant to the effective national market
system plan or plans required under Rule 603(b).
As discussed below, the Commission proposes to add definitions of
the terms ``core data,'' ``regulatory data,'' ``administrative data,''
and ``exchange-specific program data.'' The proposed definition of core
data would include those data elements that are currently considered
core data \91\ as well as reflect additional information that would be
required to be collected, consolidated, and disseminated under
Regulation NMS, including certain depth of book, odd-lot, and auction
information, which would improve the usefulness of core data for market
participants. The proposed definition of regulatory data would specify
certain regulatory messages that must be provided under Regulation NMS,
which would facilitate compliance with Commission, NMS plan, or SRO
requirements. The proposed definition of administrative data would
refer to the administrative or technical messages that are currently
required by the Equity Data Plans, or their technical specifications,
and would facilitate the efficient utilization of proposed consolidated
market data. The proposed definition of ``exchange-specific program
data'' would include information currently included in SIP data related
to retail liquidity programs that certain exchanges have established,
as well as information related to new programs that individual
exchanges may develop in the future,\92\ but only if the effective
national market system plan or plans required under Rule 603(b) are
amended to include data elements related to any such new programs in
consolidated market data.\93\
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\91\ See supra note 37 and accompanying text.
\92\ Any new exchange programs would have to be filed with the
Commission pursuant to Section 19(b) of the Exchange Act, 15 U.S.C.
78s(b), and Rule 19b-4 thereunder, 17 CFR 240.19b-4.
\93\ See infra Section III.F.
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Finally, the Commission proposes to include a provision that would
allow for additional regulatory, administrative, or exchange-specific
program data elements \94\ to be included within ``consolidated market
data'' pursuant to amendments to the effective national market system
plan(s).\95\ The Commission preliminarily believes that this provision
would help to ensure that additional information in these specific
categories may be proposed to be included in consolidated market data
in the future in response to market and regulatory developments and
that such additional information would be required to be made available
by the SROs to competing consolidators and self-aggregators, and as a
result, competing consolidators would be required to, among other
things, calculate and generate consolidated market data that includes
this additional information. The Commission preliminarily believes that
new administrative, regulatory, and exchange-specific program data
elements may emerge from time to time, and that the proposed definition
of consolidated market data should provide flexibility for such data
elements to be included by NMS plan amendment. This provision would
also maintain the current practice whereby SIP data of this type can be
expanded through the NMS plan amendment process.
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\94\ Amendments to the proposed definition of core data would
only be able to be made by the Commission. To the extent that there
are changes in the national market system, such as, in the provision
of trading services, that suggest that the definition of core data
should be updated, the Commission could exercise its authority to
propose amendments to the proposed definition. See, e.g., Section
11A(c)(1)(B) of the Exchange Act which provides that the Commission
shall prescribe rules as necessary or appropriate in the public
interest, for the protection of investors or otherwise to assure the
prompt, accurate, reliable, and fair collection, processing,
distribution, and publication of information with respect to NMS
information and the fairness and usefulness of the form and content
of such information.
\95\ Pursuant to Rule 608(a)(1), any two or more SROs, acting
jointly, may propose an amendment to an NMS plan. 17 CFR
242.608(a)(1). The Equity Data Plans also have provisions regarding
the proposal of amendments to the Plans, which currently require a
vote of the Plans' operating committee. See CTA Plan, supra note 13,
at Section IV(b)(i); CQ Plan supra note 13, at Section IV.(c)(i) of
the CQ Plan; Nasdaq UTP Plan, supra note 13, at Sections IV.C.1.a.
and XVI.
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National market system plans and amendments thereto must be filed
with, and typically are not effective unless they are approved by, the
Commission under Rule 608 of Regulation NMS.\96\
[[Page 16735]]
Pursuant to Rule 608(b), the Commission would publish for comment an
amendment to add new consolidated market data elements, and thereafter,
the Commission would evaluate any such proposed amendment and approve
it if the Commission finds the amendment is ``necessary or appropriate
in the public interest, for the protection of investors and the
maintenance of fair and orderly markets, to remove impediments to, and
perfect the mechanisms of, a national market system, or otherwise in
furtherance of the purposes of the [Exchange] Act.'' \97\
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\96\ A proposed NMS plan amendment may be put into effect upon
filing if designated by the sponsors as: ``(i) Establishing or
changing a fee or other charge collected on behalf of all of the
sponsors and/or participants in connection with access to, or use
of, any facility contemplated by the plan or amendment (including
changes in any provision with respect to distribution of any net
proceeds from such fees or other charges to the sponsors and/or
participants); (ii) Concerned solely with the administration of the
plan, or involving the governing or constituent documents relating
to any person (other than a self-regulatory organization) authorized
to implement or administer such plan on behalf of its sponsors; or
(iii) Involving solely technical or ministerial matters.'' 17 CFR
242.608(b)(3). As stated above, the Commission has proposed
amendments to this provision. Effective on Filing Proposal, supra
note 37 (proposing to rescind the provision of Rule 608 that allows
a proposed amendment to an effective national market system plan(s)
to become effective upon filing if the proposed amendment
establishes or changes a fee or other charge).
\97\ 17 CFR 242.608(b)(2).
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The Commission preliminarily believes that the proposed definition
of consolidated market data, as well as the other definitions included
therein, would, by expanding the NMS information that is required to be
provided under the rules of the national market system, support more
informed trading and investment decisions by market participants in
today's markets and facilitate the best execution of customer orders by
the full range of broker-dealers.\98\ In addition, the proposed
definition would be referenced in the amendments to Rule 603(b) and
proposed Rule 614, both of which propose to implement the decentralized
consolidation model.\99\
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\98\ As discussed below, the Commission is not requiring broker-
dealers to subscribe to or utilize every component of proposed
consolidated market data to meet their regulatory obligations. See
infra notes 306-309 and accompanying text.
\99\ See infra Sections IV.B.1 and IV.B.2(e)(ii).
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The Commission requests comment on the proposed definition of
consolidated market data under proposed Rule 600(b)(19). Throughout
this release, we request comment from the points of view of all
interested parties. With regard to any comments, we note that such
comments are of greatest assistance to our rulemaking initiative if
accompanied by supporting data and analysis of the issues addressed in
those comments.
In particular, the Commission solicits comment on the following:
1. Do commenters believe that the Commission should adopt a
definition of consolidated market data? Why or why not? Should the
Commission take an alternative approach? Why or why not?
2. Does the proposed definition of consolidated market data capture
the market data that would be useful to market participants for trading
and regulatory compliance purposes? Please explain. Does the proposed
definition of consolidated market data include any market data that
should not be included? Please explain. The Commission is seeking input
from commenters on whether the proposed definition of consolidated
market data should include additional market data or whether the
definition should otherwise be modified.
3. Should the definition of consolidated market data be set forth
in an effective national market system plan(s) instead of, or in
addition to, Rule 600(b)? Please explain. Do commenters have views on
the most appropriate process through which the content of proposed
consolidated market data should be expanded or modified? Do commenters
believe that the proposed definition of consolidated market data should
include a provision stating that additional regulatory, administrative,
or exchange-specific program data elements can be defined pursuant to
the effective national market system plan or plans required under
Section 242.603(b)? Please explain. Should the proposed definition of
core data be able to be amended through the effective national market
system plan process (for example, should the term ``core data'' be
included in proposed Rule 600(b)(19)(v))? Why or why not? Do commenters
believe that any data elements should not require an amendment to the
effective national market system plan(s) to be added to consolidated
market data? Please explain and describe what process would be
appropriate for adding any such data elements.
C. Proposed Definition of ``Core Data''
Regulation NMS does not currently define core data. Rather, today,
core data generally refers to the price, size, and exchange of the last
sale; each exchange's highest bid and lowest offer (``BBO'') and the
number of shares available at those prices; and the NBBO.\100\
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\100\ See supra note 37 and accompanying text.
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The core data that is provided today by the exclusive SIPs is of
considerable utility to some market participants for certain
purposes.\101\ However, it is of limited use to other market
participants for other purposes (e.g., as the primary data source for
automated trading systems) because of its limited content. The
Commission preliminarily believes that the content of current core data
has not kept pace with market developments. For example, decimalization
in 2001 improved prices and narrowed spreads but also reduced the size
of the top of book liquidity that is displayed and disseminated as part
of current core data.\102\ Further, individual odd-lot quotations,
especially for stocks with share prices that have risen
substantially,\103\ have become more important to market participants
as odd-lot quotations can represent significant amounts of liquidity
that are not reflected in current core data.\104\ Finally, an
increasing proportion of total trading volume is executed during
opening and closing auctions, which are significant liquidity events
every trading day, but important information about auctions is not
included within current core data provided by the exclusive SIPs.\105\
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\101\ For example, current core data includes the NBBO, which is
useful to market participants for informational purposes and to
inform trading and investment decisions. See, e.g., Roundtable Day
One Transcript at 57 (Doug Cifu, Virtu Financial) (``. . . the SIP
is an eyeball product.''); Roundtable Day One Transcript at 65
(Mehmet Kinak, T. Rowe Price) (``So the SIP for us is kind of what
we look at. Obviously, investment decisions are probably made by
eyeballs and looking at the SIP itself from either our Bloomberg or
FactSet terminals.''). It is also used as a back-up for automated
trading systems that otherwise rely on proprietary data feeds from
the exchanges and to support less sophisticated automated trading
systems. See, e.g., Roundtable Day One Transcript at 140 (Mark
Skalabrin, Redline Trading Solutions) (``the SIP . . . has been
relegated to a backup feed, really. It's a fail-over to the real
feed you need to do the job.'').
\102\ See infra notes 276-279.
\103\ See infra note 162.
\104\ As explained below, odd-lot quotations are only reflected
in SIP data to the extent that they are aggregated into round lots
pursuant to exchange rules. See infra notes 157-158 and accompanying
text.
\105\ See infra notes 330-332.
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Because the content of current core data does not reflect these
important market developments,\106\ many market participants state that
they are unable to rely solely on SIP data to trade competitively and
provide best execution to customer orders in today's markets.\107\ The
Commission preliminarily believes that the data that is required to be
collected, consolidated, and disseminated under the rules of the
national market system is no longer fulfilling the goals of Section 11A
of the
[[Page 16736]]
Exchange Act.\108\ The Commission is proposing a definition of core
data that would incorporate the information that is currently provided
in SIP data as well as additional information, including quotation data
for smaller-sized orders for higher-priced stocks, certain depth of
book data, and additional auction information.\109\ As explained below,
the Commission preliminarily believes that each of the new elements of
core data, as proposed, would enhance the usefulness of the content of
the NMS information that is collected, consolidated, and disseminated
under the rules of the national market system.\110\
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\106\ As discussed below, the existing centralized consolidation
model for collecting, consolidating, and disseminating SIP data also
has not kept pace with the needs of today's investors and market
participants. See infra Section IV.A.
\107\ See several of the Roundtable comments summarized below in
Sections III.C.1, III.C.2, and III.C.3.
\108\ See supra notes 2-5 and accompanying text.
\109\ See infra Sections III.C.1-III.C.3 for detailed
discussions of the proposed definitions of ``round lot,'' ``depth of
book data,'' and ``auction information.''
\110\ Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k-
1(c)(1)(B).
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The Commission is proposing to define core data in Rule 600(b) to
include all of the elements that currently are referred to as core
data,\111\ as well as the following data elements that are not
currently provided by the exclusive SIPs: (1) Quotation data for
smaller-sized orders for higher-priced stocks (pursuant to a new
definition of ``round lot''), (2) data on certain quotations below the
best bid or above the best offer (pursuant to a new definition of
``depth of book data''), and (3) information about orders participating
in auctions (pursuant to a new definition of ``auction information'').
As discussed below, certain OTCBB and corporate bond and index data
that are currently provided by the exclusive SIPs would not be included
in the proposed definition of core data.\112\ Further, as noted above,
the proposed term core data is reflected in the proposed definition of
consolidated market data, which is referenced in proposed Rule 603(b)
and proposed Rule 614.\113\
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\111\ See supra note 37 and accompanying text.
\112\ See infra notes 122-127 and accompanying text.
\113\ As explained below, pursuant to Rule 603(b), as proposed
to be amended, national securities exchanges and associations would
be required to make available to competing consolidators and self-
aggregators, as proposed to be defined, all data necessary to
generate consolidated market data. See infra Section IV.B.1.
Competing consolidators would be required to calculate and generate
consolidated market data and make it available to subscribers. See
proposed Rule 614(d).
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Specifically, under proposed Rule 600(b)(20), core data would be
defined as the following information with respect to quotations for and
transactions in NMS stocks: (1) Quotation sizes; (2) aggregate
quotation sizes; (3) best bid and best offer; (4) national best bid and
national best offer; (5) protected bid and protected offer; (6)
transaction reports; (7) last sale data; (8) odd-lot transaction data
disseminated pursuant to the effective national market system plan or
plans required under Rule 603(b) as of [date of Commission approval of
this proposal]; (9) depth of book data; and (10) auction information.
For purposes of the calculation and dissemination of core data by
competing consolidators, and the calculation of core data by self-
aggregators, the best bid and best offer, national best bid and
national best offer, and depth of book data would include odd-lots that
when aggregated are equal to or greater than a round lot, with such
aggregation occurring across multiple prices and disseminated at the
least aggressive price.\114\ Protected quotations, however, would only
include odd-lots at a single price that when aggregated are equal to or
greater than 100 shares.\115\
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\114\ See infra notes 157-158 and accompanying text (discussing
odd-lot aggregation).
\115\ Id. A protected quotation is defined as ``a protected bid
or a protected offer.'' See Rule 600(b)(62) of Regulation NMS, 17
CFR 242.600(b)(62). A protected bid or protected offer is defined as
``a quotation in an NMS stock that: (i) [i]s displayed by an
automated trading center; (ii) [i]s disseminated pursuant to an
effective national market system plan; and (iii) [i]s an automated
quotation that is the best bid or best offer of a national
securities exchange, the best bid or best offer of The Nasdaq Stock
Market, Inc., or the best bid or best offer of a national securities
association other than the best bid or best offer of The Nasdaq
Stock Market, Inc.'' See Rule 600(b)(61) of Regulation NMS, 17 CFR
242.600(b)(61).
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Some of the components of the proposed definition of core data--
namely, quotation sizes, aggregate quotation sizes, BBO, NBBO,
protected quotations, transaction reports, last sale data, and odd-lot
transaction data \116\--are already defined in Regulation NMS or are
currently included in SIP data.\117\ The Commission preliminarily
believes that these data elements continue to be necessary and useful
for informed market participation. This baseline information about the
best quotations and recent transactions across the national market
system provides the foundation of transparency and price discovery in
the U.S. securities markets, and the Commission preliminarily believes
investors and other market participants need it today to make informed
trading and investment decisions.\118\ Therefore, the Commission
preliminarily believes that these data elements should be included in
the definition of core data as proposed.
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\116\ See infra notes 159-161 and accompanying text (discussing
the addition of odd-lot transaction data to SIP data through NMS
plan amendments approved in 2013).
\117\ As discussed below, some of these proposed data elements--
namely, the BBO and NBBO--will be derived from smaller sized
quotations as a result of the Commission's proposed definition of
round lot, and the Commission is proposing amendments to the
definitions of protected bid and protected offer and national best
bid and offer to accommodate its proposed amendments to expand
consolidated market data and implement a decentralized consolidation
model with competing consolidators and self-aggregators.
In addition, today, the exclusive SIPs collect, consolidate, and
disseminate protected quotations, which in almost all cases, are the
best bid or best offer of a trading center. Accordingly, the NBBO
today reflects protected quotations. As discussed below, the
Commission is proposing to amend the definition of ``protected bid
or protected offer'' to require that protected bids and protected
offers be at least 100 shares. In addition, the Commission is
proposing a new round lot size definition, which would be less than
100 shares for higher-priced NMS stocks. See infra Section
III.C.1(d)(i). Accordingly, if adopted, there would be an increase
in instances where the best bid or best offer and the NBBO would not
be protected quotations. See infra Section III.C.1(d)(ii).
\118\ See supra note 101.
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As discussed in detail below, the Commission is proposing to
include certain depth of book data and auction information in the
proposed definition of core data. Because of the dispersion of
liquidity to prices away from the best bids and best offers \119\ and
the increasing proportion of orders that are executed during
auctions,\120\ the Commission preliminarily believes that market
participants need depth of book data and auction information to fully
participate in the markets and the information would facilitate best
execution.\121\ The Commission preliminarily believes that the proposed
depth of book data and auction information would enhance the usefulness
of proposed core data.
---------------------------------------------------------------------------
\119\ See infra notes 276-279 and accompanying text.
\120\ See infra notes 330, 348 and accompanying text.
\121\ See infra Sections III.C.2(d) and III.C.3(c).
---------------------------------------------------------------------------
As discussed above, SIP data currently includes certain data that
would not be included in the definition of core data under the
Commission's proposed definition.\122\ Currently, Nasdaq UTP Plan Level
1 subscribers can obtain OTCBB quotation and transaction feeds for
unlisted stocks.\123\ Similarly, the CTA Plan permits the dissemination
of ``concurrent use'' data relating to corporate bonds and
indexes.\124\ This information would not be included in the proposed
definitions of core data or consolidated market data. OTCBB stocks,
corporate bonds, and
[[Page 16737]]
indices are not NMS securities as defined in Regulation NMS \125\ and,
therefore, the Regulation NMS rules related to the collection,
consolidation, and dissemination of information regarding NMS
securities, and the NMS plan(s) required under Rule 603(b) for NMS
stocks,\126\ do not apply. Accordingly, this information is not
included in the proposed definition of core data.\127\
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\122\ In addition, because this data does not fall under the
proposed definitions of regulatory data or administrative data, it
would not be part of proposed ``consolidated market data'' either.
\123\ See Nasdaq UTP DataFeed Approval Request, available at
http://www.utpplan.com/datafeed_approval (last accessed Sept. 8,
2019); supra note 41.
\124\ See CTA Plan, supra note 13, at Section XIII; supra note
41.
\125\ ``NMS security'' is defined as ``any security or class of
securities for which transaction reports are collected, processed,
and made available pursuant to an effective transaction reporting
plan, or an effective national market system plan for reporting
transactions in listed options.'' 17 CFR 242.600(b)(47). ``Effective
transaction reporting plan'' is defined as ``any transaction
reporting plan approved by the Commission pursuant to Sec.
242.601.'' 17 CFR 242.600(b)(23). Rule 601 requires a transaction
reporting plan to be filed and approved pursuant to Rule 608 and to
specify ``[t]he listed equity and Nasdaq securities or classes of
such securities for which transaction reports shall be required by
the plan.'' 17 CFR 242.601(a)(2). Therefore, OTCBB securities are
not NMS securities.
\126\ ``NMS stock'' is defined as ``any NMS security other than
an option.'' 17 CFR 242.600(b)(48). See also 17 CFR 242.600(b)(47)
(defining NMS security).
\127\ One commenter suggested that this ``extraneous'' data
should be removed from the exclusive SIPs. See Nasdaq, Total
Markets: A Blueprint for a Better Tomorrow, 18 (``Nasdaq Total
Markets Report''), available at https://www.nasdaq.com/docs/Nasdaq_TotalMarkets_2019_2.pdf.
---------------------------------------------------------------------------
However, the Commission's proposed definitions of core data and
consolidated market data would not prohibit the independent provision
of other types of market data by the SROs, and, as discussed below,
under the decentralized consolidation model, competing consolidators
would be permitted to collect data from the SROs and offer data
products to subscribers that go beyond what is proposed to be defined
as core data or consolidated market data. Therefore, the exclusion of
OTCBB and concurrent use data from the proposed definitions of core
data and consolidated market data does not preclude the provision of
this data to market participants who wish to receive it.
Finally, the proposed definition of core data requires that the
BBO, NBBO, and the proposed depth of book data include odd-lots that
when aggregated are equal to or greater than a round lot, and that such
aggregation would occur across multiple prices and be disseminated at
the least aggressive price of all such aggregated odd-lots. Several
national securities exchanges today have rules that provide for a
similar odd-lot aggregation procedure for purposes of providing
quotation data to the exclusive SIPs.\128\ Although not currently
required by Regulation NMS, odd-lot aggregation increases the amount of
quotation data that is included in SIP data and provides transparency
into trading interest would not otherwise have been represented in such
data. The Commission preliminarily believes that this information is
important and should uniformly be included in the proposed core data
disseminated to investors and market participants.\129\ In addition,
for similar reasons, the Commission proposes to include odd-lots that,
when aggregated, form a round lot for purposes of the new proposed
definition of depth of book data.\130\
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\128\ See infra note 157 and accompanying text.
\129\ As discussed below, SROs may make the data necessary to
generate consolidated market data available to competing
consolidators and self-aggregators through their existing
proprietary data products. See infra Section IV.B.1. Accordingly,
any odd-lot quotations that are aggregated in an SRO's existing
proprietary data products would be required to be aggregated in a
manner consistent with the method set forth in the proposed
definition of core data. See also proposed Rule 603(b). However,
self-aggregators would only be required to aggregate odd-lots as
prescribed in Rule 600(b)(20) to the extent that generating a
particular component of proposed core data is necessary for that
self-aggregator to comply with applicable regulatory requirements.
For example, to the extent that a self-aggregator's activities
require the self-aggregator to generate the NBBO, the self-
aggregator shall do so as described in Rule 600(b)(20).
\130\ Today, odd-lots are only aggregated into round lots for
purposes of providing an exchange's best bids and offers to the
exclusive SIPs. See infra note 157.
---------------------------------------------------------------------------
The Commission preliminarily believes, however, that the proposed
definition of core data should require a different procedure with
respect to the aggregation of odd-lots for purposes of protected
quotations.\131\ For the reasons discussed below, the scope of Rule 611
would not be extended to protected quotations of less than 100
shares.\132\ The Commission preliminarily believes that aggregating
odd-lots across multiple price points for purposes of determining
protected quotations would effectively extend trade-through protection
to quotes of less than 100 shares at different prices.\133\ Therefore,
the proposed definition of core data provides that, for purposes of the
calculation and dissemination of proposed core data by competing
consolidators, and the calculation of proposed core data by self-
aggregators, protected quotations would only include odd-lots at a
single price that, when aggregated, are equal to or greater than 100
shares. However, the Commission is seeking comment on whether and how
odd-lots should be aggregated and the specific proposed core data
elements to which such aggregation should apply.
---------------------------------------------------------------------------
\131\ See supra note 115 for the definition of ``protected
quotation.'' Odd-lot quotations are not protected quotations under
Rule 611. However, as explained below, many exchanges, pursuant to
their own rules, aggregate odd-lots across multiple price points
into round lots for purposes of providing protected quotations to
the exclusive SIPs. See infra notes 157-158 and accompanying text.
Although not required by Rule 611 or contemplated upon adoption of
Regulation NMS, this has become the prevailing practice. The odd-lot
aggregation methodology set forth in the Commission's proposed
definition of core data would modify this practice. See infra
Section VI.C.1(c)(i).
\132\ See infra Section III.C.1(d)(ii).
\133\ See infra Section III.C.1(d)(ii) for a discussion of the
proposed changes to protected bid and protected offer.
---------------------------------------------------------------------------
The Commission requests comment on the proposed amendment to Rule
600(b)(20) to introduce a definition of core data. In particular, the
Commission solicits comment on the following:
4. Do commenters believe Rule 600 should be amended to include a
definition of core data? Why or why not?
5. Do commenters believe that the Commission's proposed definition
of core data captures the key components of information with respect to
quotations for and transactions in NMS stocks that are useful for
participating in today's markets? Are there any other useful market
data elements that should be included in the proposed definition? Does
the proposed definition include any elements that are not useful for
trading? Please explain.
6. Do commenters believe that there is sufficient demand for OTCBB,
concurrent use, or other data currently provided by the exclusive SIPs
that would not fall within the proposed definition of core data such
that an independent market for the provision of this data would
develop? Why or why not? Would the SROs or other entities that
currently disseminate this data through the exclusive SIPs provide it
through other means (i.e., to competing consolidators or directly to
interested market participants)? Please explain.
7. The Commission is proposing to include protected quotations in
the proposed definition of core data. Do commenters believe that there
is a need for a ``national protected best bid or offer'' analogous to
the NBBO that would represent a snapshot of the single best protected
bid and single best protected offer from among all the protected bids
and offers of each SRO? Would this be a useful metric for competing
consolidators to calculate and disseminate for market participants for
either routing or regulatory compliance (e.g., the order execution
disclosures required under Rule 605) purposes? Would firms that intend
to self-aggregate produce such a metric on their own? Please explain.
[[Page 16738]]
1. Round Lot Size
Today, SIP data includes quotation information in round lots and
transaction information in both round lots and odd-lots. Market
participants interested in quotation data for individual odd-lot orders
must purchase it from exchange proprietary feeds. As share prices for
many widely-held stocks have risen, individual odd-lot orders now often
represent economically significant trading opportunities at prices that
are better than the prices of displayed and disseminated round
lots.\134\ Accordingly, information about individual odd-lot orders has
gained increased importance with investors and market participants, and
some have suggested that odd-lot orders should be included in SIP
data.\135\
---------------------------------------------------------------------------
\134\ See infra note 166 and accompanying text, and infra text
accompanying notes 166-170 for staff analysis of odd-lot activity
for the top 500 securities by dollar volume.
\135\ See infra notes 170-177.
---------------------------------------------------------------------------
The Commission is proposing to include certain information about
quotations that are currently defined as odd-lots \136\ in proposed
core data by introducing a tiered definition of the term ``round lot.''
As proposed, the definition of round lot would assign different round
lot sizes to individual NMS stocks depending upon their stock price.
The Commission preliminarily believes this would improve the usefulness
of proposed consolidated market data, promote fair competition,\137\
and, like the addition of odd-lot transaction data to SIP data, would
provide important information to investors and other market
participants that would enhance transparency and price discovery.\138\
Moreover, since odd-lot quotes often represent opportunities to trade
at prices that are superior to the prices disseminated by the Equity
Data Plans,\139\ the inclusion of more of these quotes in proposed core
data would facilitate the best execution analyses of broker-dealers who
do not subscribe to proprietary data feeds that include all odd-lot
information.\140\ Further, it would facilitate the ability of investors
to use proposed core data to verify that their broker-dealers are
providing best execution by providing investors with additional
information on the pricing of smaller-sized orders.
---------------------------------------------------------------------------
\136\ Rule 600(b)(51) defines odd-lot as ``an order for the
purchase or sale of an NMS stock in an amount less than a round
lot.''
\137\ See 15 U.S.C. 78k-1(a)(1)(C)(ii) (``The Congress finds
that . . . [i]t is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly
markets to assure . . . fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets
other than exchange markets.'').
\138\ See infra notes 159-160 and accompanying text.
\139\ See infra notes 166-170 and accompanying text.
\140\ Statements made by market participants suggest that a
significant number of broker-dealers do not subscribe to all
proprietary market data products. See Roundtable Day One Transcript
at 178 (James Brooks, ICE Data Services) (``[R]oughly half of the
global investment banks take the most comprehensive New York Stock
Exchange order-by-order feed, the other half do not.''); Roundtable
Day One Transcript at 181 (Michael Friedman, Trillium Management)
(``[T]he big fish . . . are the major consumers of depth-of-book
data. I think there was some evidence . . . that there were only 50
to 100 firms, period who buy all of the depth-of-book feeds.'').
---------------------------------------------------------------------------
(a) Regulatory Background
Round lot, though not defined in the Exchange Act or Regulation
NMS, typically refers to orders or quotes for 100 shares or multiples
thereof. Exchange rules typically define a round lot as 100 shares, but
they also allow the exchange discretion to define it otherwise.\141\
The technical specifications for the Equity Data Plans provide similar
definitions. For example, the CTA Plan defines round lot as
``[t]ypically 100 shares of stock or any number of shares that is a
multiple of 100 (i.e., 100, 600, 1,600, etc.).'' \142\ The exclusive
SIP feeds also disseminate quotation and transaction information for
stocks that have a round lot size of 10 or 1.\143\
---------------------------------------------------------------------------
\141\ See, e.g., NYSE Rule 55 (``Securities traded on the
Exchange shall be quoted in round lots (generally 100 shares),
except that in the case of certain stocks designated by the Exchange
the round lot shall be such lesser number of shares as may be
determined by the Exchange, with respect to each stock so
designated.''); Nasdaq Rule 5005(a)(39) (```Round Lot' or `Normal
Unit of Trading' means 100 shares of a security unless, with respect
to a particular security, Nasdaq determines that a normal unit of
trading shall constitute other than 100 shares.''). According to
NYSE Trade and Quote (``TAQ'') Data, as of August 2019, twelve
stocks, all of which are listed on NYSE or NYSE American, had a
round lot size other than 100. Ten stocks had a round lot of ten and
two stocks had a round lot of one.
\142\ Consolidated Tape System, Multicast Output Binary
Specification, 85 (May 8, 2018), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_OUTPUT_SPECIFICATION.pdf. The technical specifications
for the Nasdaq UTP Plan note that ``[f]or most NASDAQ issues, the
round lot size is 100 shares.'' UTP Data Feed Services
Specification, 22, available at http://www.utpplan.com/DOC/UtpBinaryOutputSpec.pdf (last accessed Jan. 7, 2020).
\143\ See supra note 141.
---------------------------------------------------------------------------
Regulation NMS defines ``odd-lot'' as ``an order for the purchase
or sale of an NMS stock in an amount less than a round lot.'' \144\
Exchange definitions of odd-lot are similar, as is the definition of
odd-lot in the technical specifications for the CTA Plan.\145\
---------------------------------------------------------------------------
\144\ 17 CFR 242.600(b)(51).
\145\ See, e.g., Cboe BZX Rule 11.10 (``One hundred (100) shares
shall constitute a `round lot,' any amount less than 100 shares
shall constitute an `odd lot,' and any amount greater than 100
shares that is not a multiple of a round lot shall constitute a
`mixed lot.' ''); Consolidated Tape System, Multicast Output Binary
Specification, 84 (May 8, 2018), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_OUTPUT_SPECIFICATION.pdf (defining ``odd lot'' as ``[a]n
order amount for a security that is less than the normal unit of
trading for that particular asset. Odd lots are considered to be
anything less than the standard units of trade of 1, 10 or 100
shares.'').
---------------------------------------------------------------------------
Despite the absence of a round lot definition, other key defined
terms in Regulation NMS--such as ``bid or offer,'' ``best bid and best
offer,'' and ``quotation''--refer, directly or indirectly, to round
lot. The effect of these references to round lot is that odd-lot
quotation information is not currently collected or disseminated under
Regulation NMS.\146\ For example, Rule 601 refers to ``transaction
reports,'' \147\ the definition of which refers to round lot.\148\ Rule
602 refers to ``bids'' and ``offers,'' \149\ the definition of which
also refer to round lot.\150\ Rule 603 refers to a ``national best bid
and national best offer,'' \151\ which ultimately refers back to round
lot.\152\ Rules 610 (access to quotations) \153\ and 611 (order
protection rule) \154\ do not apply to odd-lot orders. Rule 604
(display of customer limit orders) also refers to bids and offers \155\
and specifically excludes odd-lot orders.\156\
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\146\ The Commission's proposal to add a definition of round lot
will result in the inclusion of additional quotation data for
smaller-sized orders in proposed core data, and, as discussed below
in Section III.C.1(d)(i), will also affect the firm quote
requirements of Rule 602(b), the customer limit order display
requirements of Rule 604, the order execution disclosures required
under Rule 605, the requirements under Rule 610(c) regarding fees
for accessing quotations, and the Short Sale Circuit Breaker
requirements of Rule 201. As discussed below in Section
III.C.1(d)(ii), the Commission is also proposing certain amendments
to the definition of ``protected bid or protected offer'' so that
the scope of the order protection requirements of Rule 611 and the
locked and crossed market prevention requirements of Rule 610(c) are
not extended to the proposed smaller round lot sizes.
\147\ See Rule 601, 17 CFR 242.601.
\148\ See Rule 600(b)(84), 17 CFR 242.600(b)(84).
\149\ See Rule 602, 17 CFR 242.602.
\150\ See Rule 600(b)(9), 17 CFR 242.600(b)(9).
\151\ See Rule 603, 17 CFR 242.603.
\152\ See Rule 600(b)(43), 17 CFR 242.600(b)(43); Rule
600(b)(9), 17 CFR 242.600(b)(9).
\153\ See Rule 610, 17 CFR 242.610.
\154\ See Rule 611, 17 CFR 242.611.
\155\ See Rule 604, 17 CFR 242.604.
\156\ See Rule 604(b)(3), 17 CFR 242.604(b)(3).
---------------------------------------------------------------------------
Several exchanges, however, pursuant to their own rules, aggregate
odd-lot orders into round lots and report such aggregated odd-lot
orders as quotation information to the exclusive SIPs. Exchange rules
specify how the
[[Page 16739]]
aggregation process works in different terms and with different levels
of specificity,\157\ but many exchanges aggregate odd-lots across
multiple prices and provide them to the exclusive SIPs at the least
aggressive price if the combined odd-lot interest is equal to or
greater than a round lot.\158\
---------------------------------------------------------------------------
\157\ See, e.g., NYSE Rule 7.36 (``The best-ranked non-
marketable displayed Limit Order(s) to buy and the best ranked non-
marketable displayed Limit Order(s) to sell in the Exchange Book and
the aggregate displayed size of such orders associated with such
prices will be collected and made available to quotation vendors for
dissemination pursuant to the requirements of Rule 602 of Regulation
NMS under the Exchange Act. If non-marketable odd-lot sized orders
at multiple price levels can be aggregated to equal at least a round
lot, such odd-lot sized orders will be displayed as the best ranked
displayed orders to sell (buy) at the least aggressive price at
which such odd-lot sized orders can be aggregated to equal at least
a round lot.''); Nasdaq Rule 4756 (``Pursuant to Rule 602 of
Regulation NMS under the Exchange Act, Nasdaq will transmit for
display to the appropriate network processor for each System
Security: (i) The highest price to buy wherein the aggregate size of
all displayed buy interest in the System greater than or equal to
that price is one round lot or greater; (ii) the aggregate size of
all displayed buy interest in the System greater than or equal to
the price in (i), rounded down to the nearest round lot; (iii) the
lowest price to sell wherein the aggregate size of all displayed
sell interest in the System less than or equal to that price is one
round lot or greater; and (iv) the aggregate size of all displayed
sell interest in the System less than or equal to the price in
(iii), rounded down to the nearest round lot.''); Cboe BZX Rule
11.9(c)(2) (``Odd Lot Orders are only eligible to be Protected
Quotations if aggregated to form a round lot.''); supra Section
III.C for a discussion of odd-lot aggregation. As noted above, the
proposed definition of core data sets forth a methodology for odd-
lot aggregation for the components of core data. Any odd-lot
quotations that are aggregated in an SRO's existing proprietary data
products would be required to be aggregated in a manner consistent
with the method set forth in the proposed definition of core data.
See supra note 129.
\158\ See id. For example, if there are three sell orders on an
exchange for a particular NMS stock--30 shares at $10.08, 20 shares
at $10.09, and 50 shares at $10.10--the exchange will post 100
shares at $10.10 as a protected round lot quote to the exclusive
SIP. See infra Section VI.C.1(c)(i).
---------------------------------------------------------------------------
In 2013, the participants to the Equity Data Plans filed proposed
amendments to the Plans to add odd-lot transactions to SIP data.\159\
In support of the proposed amendments, the participants to the Equity
Data Plans noted that ``odd-lot transactions account for a not
insignificant percentage of trading volume, [and] the Participants have
determined that including odd-lot transactions on the consolidated tape
. . . would add post-trade transparency to the marketplace.'' \160\ In
approving the amendments, the Commission agreed that ``odd-lot
transactions comprise a noteworthy percentage of total trading
volume,'' and stated that ``including odd-lot transactions on the
consolidated tape will enhance post-trade transparency, as well as
price discovery, and consequently would further the goals of the
[Exchange] Act,'' and that ``information about odd-lot transactions
would provide important information to investors and other market
participants and therefore represents a positive development in the
provision of market data.'' \161\
---------------------------------------------------------------------------
\159\ Odd-lot transaction data that is required to be collected,
consolidated, and disseminated pursuant to the Equity Data Plans
would be included in the proposed definition of consolidated market
data pursuant to proposed Rule 600(b)(20)(viii).
\160\ Securities Exchange Act Release Nos. 70793 (Oct. 31,
2013), 78 FR 66788 (Nov. 6, 2013) (order approving Amendment No. 30
to the UTP Plan to require odd-lot transactions to be reported to
consolidated tape); 70794 (Oct. 31, 2013), 78 FR 66789 (Nov. 6,
2013) (order approving Eighteenth Substantive Amendment to the
Second Restatement of the CTA Plan to require odd-lot transactions
to be reported to consolidated tape).
\161\ Id. at 66789-66790.
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(b) Market Evolution
In recent years, the share prices of some of the most widely-held
stocks have increased substantially.\162\ As a result of higher share
prices, odd-lot orders in many securities have a high dollar, or
notional, value. Because SIP data does not currently include odd-lot
quotation information except to the extent that cumulative odd-lot
interest equals or exceeds a round lot, the best quote reflected in
proprietary data products, especially for many high-priced stocks, may
be an odd-lot order that is at a price that is better than the best bid
or best offer that is disseminated by the exclusive SIPs. Indeed, as
discussed below, an analysis of odd-lot transaction data and comments
made in connection with the Roundtable indicate that odd-lot orders are
frequently priced better than the quotation prices that are
disseminated by the exclusive SIPs, yet these orders are not seen by
investors or market participants that rely solely on SIP data.\163\
---------------------------------------------------------------------------
\162\ For example, between 2004 and 2019, the average price of a
stock in the Dow Jones Industrial Average nearly quadrupled.
\163\ See Roundtable Day Two Transcript at 66 (Paul O'Donnell,
Morgan Stanley) (``We all know that, for high-price stocks, there is
a market inside the NBBO''); Roundtable Day One Transcript at 116
(Michael Blaugrund, NYSE) (recommending the inclusion in core data
of odd-lots priced better than the BBO); Healthy Markets Association
Letter II; staff odd-lot analysis, infra (observing that 43% of odd-
lot transactions in September of 2019 occurred at prices better than
the NBBO).
---------------------------------------------------------------------------
The importance of increasing the transparency of odd-lot quotation
information is supported by odd-lot quotation and transaction data.
First, odd-lot transactions make up a significant proportion of
transaction volume in NMS stocks, including exchange-traded products
(``ETPs''). Based on data from the SEC's MIDAS analytics tool,\164\ the
daily exchange odd-lot rate (i.e., the number of exchange odd-lot
trades as a proportion of the number of all exchange trades) for all
corporate stocks ranged from approximately 29% to 42% of trades and the
daily exchange odd-lot rate for all ETPs ranged from 14% to 20% of
trades in 2018. More recently, in June 2019, the daily exchange odd-lot
rate for all corporate stocks exceeded 50% several times (and exceeded
65% several times for the top decile by price) and reached almost 30%
for all ETPs in the same period.\165\ Exchange odd-lot volume as a
proportion of total exchange-traded volume also rose in June 2019,
reaching approximately 15% for all corporate stocks (and over 30% for
the top decile by price) and approximately 4% for all ETPs.\166\
---------------------------------------------------------------------------
\164\ Staff accessed consolidated data from the Equity Data
Plans and exchange depth of book data, both of which staff receive
through the SEC's MIDAS platform. See Market Data Analytics System
(``MIDAS''), available at https://www.sec.gov/marketstructure/midas.html. This data is commercially available.
\165\ Id. See also Alexander Osipovich, Tiny `Odd-Lot' Trades
Reach Record Share of U.S. Stock Market, Wall Street Journal (Oct.
23, 2019) (``The share of trades in odd-lot sizes hit a record 48.9%
on Oct. 7 and has stayed above 40% ever since, according to the NYSE
data, which cover all U.S. equity trades, not just those on the Big
Board.'').
\166\ See supra note 164.
---------------------------------------------------------------------------
Staff examined odd-lot trade and message volume, duration on the
inside,\167\ order-book distribution, and quoted spreads for the top
500 securities by dollar volume during the week of September 10-14,
2018, using the exclusive SIP trades, exclusive SIP quotes, off-
exchange data from FINRA's TRFs, and all of the exchanges' proprietary
data feeds. Staff found that a significant portion of quotation and
trading activity occurs in odd-lots, particularly for frequently
traded, high-priced securities.\168\
---------------------------------------------------------------------------
\167\ Duration on the inside is the percent of the day the
aggregate size at the best price (bid, offer, or both) is less than
100 shares based on the exchange proprietary data feeds.
\168\ For example, staff observed that over 86% of the trades
that occurred in the two largest securities by market capitalization
that have share prices greater than $1,000 occurred in odd-lot share
amounts.
---------------------------------------------------------------------------
Staff compared the bid-ask spread when using exclusive SIP
quotation information (which is in round lots) vs. quotation
information in the proprietary feeds (which includes odd-lots). On
average, the measure of bid-ask spread, an important metric in
understanding market liquidity and quote competition, widens (i.e.,
degrades) significantly when calculated using only round lots relative
to the odd-lot quotations displayed on proprietary feeds. In addition,
as average stock share prices
[[Page 16740]]
rose, bid-ask spreads based only on round lots generally widened by a
greater amount than did spreads based on round lots and odd-lots.
During the period staff analyzed, for the 500 most frequently traded
securities by dollar volume, the average bid-ask spread of the 50
securities with the highest share prices decreased (improved or
tightened) by $.05970 when calculated using the proprietary feeds
relative to the exclusive SIP feed. Bid-ask spreads for the 50
securities with the lowest share prices showed less improvement when
using the proprietary feeds relative to the exclusive SIP feed,
decreasing (or tightening) on average by $.00017.
Staff also evaluated the frequency of trades in odd-lot sizes for
the top 500 securities by dollar volume and found that frequently
traded, high priced securities are likely to have a substantial portion
of executions occur in odd-lot sizes. More than 25 percent of the on-
exchange share volume of the 50 securities with the highest share
prices occurred in odd-lot sizes. In comparison, less than 2% of the
on-exchange share volume of the 50 securities with the lowest share
prices occurred in odd-lot sizes.
In addition, as noted above,\169\ statements made by Roundtable
panelists and commenters suggest that odd-lot orders can reflect prices
that are better than the quotation prices that are disseminated by the
exclusive SIPs. These observations are consistent with staff
observations of odd-lot transaction pricing reflected in recent trading
data. During the month of September 2019, a substantial proportion of
odd-lot trades occurred at prices that are better than the prevailing
NBBO. Specifically, approximately 51% of all trades executed on
exchange and approximately 14% of all volume executed on exchange in
corporate stocks (3,930 unique symbols) occurred in odd-lot sizes
(i.e., less than 100 shares), and 43% of those odd-lot transactions
(representing approximately 39% of all odd-lot volume) occurred at a
price better than the NBBO.
---------------------------------------------------------------------------
\169\ See supra note 163.
---------------------------------------------------------------------------
(c) Roundtable Discussion, Comments, and Alternative Proposals
In connection with the Roundtable, one commenter presented data
showing increased odd-lot trading and quoting rates over the last
several years, as well as the existence of quotes on proprietary feeds
that are at prices better than the NBBO disseminated by the exclusive
SIPs.\170\ Several panelists at the Roundtable were supportive of
adding odd-lot quotation information to SIP data.\171\ One panelist who
supported adding odd-lot orders to SIP data noted that the application
of order protection under Rule 611 to odd-lot quotes would need to be
considered and added that he would likely be in favor of applying Rule
611 to odd-lot quotes.\172\ Finally, one panelist emphasized the
importance of odd-lot quotation data to market participants, stating
that content that exists only in the proprietary feeds--such as odd-
lots--is needed to make effective decisions in trading applications and
to fill client orders effectively.\173\
---------------------------------------------------------------------------
\170\ Letter to Brent J. Fields, Secretary, Commission, from
Tyler Gellasch, Executive Director, Healthy Markets Association, 5-
11 (Mar. 5, 2019) (``Healthy Markets Association Letter II''). See
also Letter to Brent J. Fields, Secretary, Commission, from Rich
Steiner, Head of Client Advocacy and Market Innovation, RBC Capital
Markets, LLC (Oct. 25, 2019) (``RBC Letter'') (stating that internal
research suggested exclusive SIPs should display odd-lot quotes).
\171\ See Roundtable Day One Transcript at 98-99 (Stacey
Cunningham, NYSE); Roundtable Day One Transcript at 116-17 (Michael
Blaugrund, NYSE); Roundtable Day Two Transcript at 72 (Michael
Blaugrund, NYSE) (recommending expanding consolidated market data to
include odd-lot orders priced better than the BBO); Roundtable Day
One Transcript at 157-59 (Oliver Albers, Nasdaq) (stating that over
50% of the notional value of Nasdaq-listed names is in high priced
stocks); Roundtable Day One Transcript at 226-27 (Chris Isaacson,
Cboe); Roundtable Day Two Transcript at 73 (Prof. Robert Bartlett,
UC Berkeley) (stating that including odd-lots in the trade data has
been incredibly useful and including it in the quote data would be
also helpful).
\172\ See Roundtable Day One Transcript at 226-27 (Chris
Isaacson, Cboe). In addition, another panelist suggested that
revisiting Rule 611 for odd-lots has merit. See Roundtable Day One
Transcript at 231-32 (Vlad Khandros, UBS). See also Robert Battalio,
et al., Unrecognized Odd Lot Liquidity Supply: A Hidden Trading Cost
for High Priced Stocks, The Journal of Trading (Winter 2017),
available at https://jot.pm-research.com/content/iijtrade/12/1/35.full.pdf (``[T]he exclusion of odd lot orders from the protected
NBBO quote produces cases in which trades fill at prices worse than
available opposite-side trading interests.'').
\173\ See Roundtable Day One Transcript at 127-28 (Mark
Skalabrin, Redline Trading Solutions).
---------------------------------------------------------------------------
In addition, several comment letters submitted in connection with
the Roundtable supported adding odd-lot quotation information to SIP
data or otherwise highlighted negative consequences of its exclusion
from SIP data.\174\ One commenter stated that the Commission should
consider rulemaking to expand SIP data to include odd-lot information
during which the Commission could gather data and determine whether
odd-lots are valuable for price discovery for all securities.\175\
Commenters asserted that having to purchase ``relatively basic data
such as odd-lots'' through exchange proprietary offerings goes against
one of the main purposes of the national market system: Enabling
investors' orders to be executed without the participation of a
dealer.\176\ Another commenter provided data showing that proprietary
feeds that include odd-lot quotes reflect superior pricing compared to
the SIP data disseminated by the Equity Data Plans and indicated its
support for adding odd-lot quotes to SIP data.\177\ Similarly, another
commenter stated that as stock prices overall have risen and average
trade sizes have fallen, odd-lots are becoming more important in the
trading process, and the commenter presented data showing that stock
price has a meaningful impact on odd-lot frequency and trade size and
that high-priced stocks frequently trade in smaller quantities.\178\
---------------------------------------------------------------------------
\174\ See Letter to Brent J. Fields, Secretary, Commission, from
NYSE Group, 6, 13 (Oct. 24, 2018) (``NYSE Group Letter'') (stating
that ``[o]dd-lot quoting, particularly in high-priced securities,
has become more prevalent in today's markets and its exclusion from
SIP feeds seems anachronistic''; recommending that core data be
expanded to include ``the best bid and offer of any quantity''; and
stating that ``Main Street would benefit if the prices disseminated
by the SIPs included odd-lot quotes''); Letter to Vanessa
Countryman, Acting Secretary, Commission, from Theodore R. Lazo,
Managing Director and Associate General Counsel, SIFMA (Sept. 18,
2019) (``SIFMA Letter II''); Letter to Brent J. Fields, Secretary,
Commission, from Richard H. Baker, President and CEO, Global Head of
Government Affairs Managed Funds Association and Jir[iacute]
Kr[oacute]l, Deputy CEO, Global Head of Government Affairs, AIMA, 3-
4 (Dec. 20, 2018) (``MFA and AIMA Letter''); Healthy Markets
Association Letter II.
\175\ See SIFMA Letter II at 3.
\176\ See MFA and AIMA Letter at 3-4.
\177\ See Healthy Markets Association Letter II.
\178\ See RBC Letter at 1-2 (highlighting that approximately 50%
of all odd-lot trades in stocks priced between $50 and $250 are in
20 shares or less).
---------------------------------------------------------------------------
Some Roundtable panelists, however, pointed out complications that
might arise from the addition of more odd-lot information to the SIP
data. One panelist stated that an issue with adding odd-lot quotations
to the Equity Data Plans is that they are not protected quotations
under Rule 611, so, in the view of the panelist, there would be
uncertainty as to whether a broker-dealer has to access odd-lot
quotations to meet regulatory obligations. This panelist added that
there will need to be clarity as to how odd-lots are reported to the
exclusive SIPs and represented in the consolidated tapes (e.g., whether
50 shares at $10 and 100 shares at $10 will be shown separately or as
150 shares at $10).\179\ Another panelist stated that caution should be
exercised in adding odd-lots to SIP data to avoid
[[Page 16741]]
overwhelming market participants with information. This panelist
suggested that a ``price level metric,'' such as including odd-lot
orders with a value in excess of a specified price, might make
sense.\180\
---------------------------------------------------------------------------
\179\ See Roundtable Day One Transcript at 159-60 (Adam
Inzirillo, BAML) (stating that the different display options could
result in a change from current practices).
\180\ See Roundtable Day One Transcript at 160-61 (Matt
Billings, TD Ameritrade).
---------------------------------------------------------------------------
On October 2, 2019, the Equity Data Plans published an ``initial
proposal'' for public comment regarding the addition of odd-lot quotes
to the Equity Data Plans for dissemination by the respective exclusive
SIPs.\181\ Under this proposal, the addition of odd-lot quotes would
not change how the NBBO is calculated, nor would such quotes be
``protected quotations'' \182\ under Regulation NMS. Rather, the odd-
lot quote data would be ``ancillary'' data available to exclusive SIP
customers.\183\ Each exchange would send its top of book odd-lot quotes
to the exclusive SIPs in the same form in which it currently sends its
top of book round lot quotes.\184\ An ``odd-lot best bid and offer''
would be calculated in the same manner as the round lot NBBO, but would
not be disseminated when it is worse than the NBBO.\185\
---------------------------------------------------------------------------
\181\ See CTA Plan and UTP Plan, Odd Lots Initial Proposal
(``SIP Odd Lot Initial Proposals''), available at http://www.utpplan.com/DOC/Odd_Lots_Proposal.pdf, https://ctaplan.com/publicdocs/CTA_Odd_Lots_Proposal.pdf; CTA Plan and UTP Plan
Operating Committees, SIP Operating Committees Seek Comment on
Proposal to Add Odd Lot Quotes to SIP Data Feeds (Oct. 2, 2019)
(``SIP Odd Lots Proposal Press Release''), available at https://www.globenewswire.com/news-release/2019/10/02/1924016/0/en/SIP-Operating-Committees-Seek-Comment-on-Proposal-to-Add-Odd-Lot-Quotes-to-SIP-Data-Feeds.html; Letter from Robert Books, Chairman, UTP and
CTA Operating Committees, to industry members and investors, 1 (Jan.
6, 2020) (``CTA and UTP Annual Letter''), available at https://forefrontcomms.com/wp-content/uploads/2020/01/2020-Annual-Letter_FINAL_.pdf. The SIP Odd Lot Initial Proposals are the subject
of continuing consideration by the operating committees. Comments
are available at https://www.ctaplan.com/oddlots.
\182\ See supra note 115.
\183\ See SIP Odd Lot Initial Proposals, supra note 181, at 1.
\184\ See id.
\185\ See id.
---------------------------------------------------------------------------
Additionally, on January 21, 2020, Cboe Global Markets, Inc.
(``Cboe'') published a report detailing its recommendations for U.S.
equity market structure.\186\ In the report, Cboe recommended that top
of book odd-lot quotations be included in the exclusive SIP feeds.\187\
Furthermore, Cboe recommended redefining round lot with lower numbers
for higher priced securities.\188\
---------------------------------------------------------------------------
\186\ Cboe, Cboe's Vision: Equity Market Structure Reform (Jan.
21, 2020) (``Cboe Report''), available at http://www.cboe.com/aboutcboe/government-relations/pdf/cboes-vision-equity-market-structure-reform-2020.pdf.
\187\ See id. at 3.
\188\ See id. at 2-3.
---------------------------------------------------------------------------
(d) Commission Discussion and Proposal
(i) Proposed Definition of Round Lot
Data on odd-lot trading and quoting activity evaluated by
staff,\189\ and the remarks and comments of market participants,
suggest that SIP data omits a substantial amount of economically
significant trading interest. Furthermore, bid-ask spreads calculated
using round lot orders do not include some odd-lot quotations that may
be at prices better than round lot orders, particularly for higher
priced securities.\190\ The Commission is concerned that information
about significant trading interest in odd-lot orders is only available
to market participants who have purchased proprietary market data
products from exchanges and remains unavailable to those that rely
solely on SIP data. This creates a potentially significant information
asymmetry between SIP data and proprietary data.\191\ Further, the
Commission is concerned about the view expressed by some market
participants that achieving best execution may be difficult for broker-
dealers that rely solely on SIP data.
---------------------------------------------------------------------------
\189\ See supra Section III.C.1(b) (discussing staff odd-lot
analysis).
\190\ Id.
\191\ Specifically, larger or better resourced broker-dealers
may be more capable of paying the fees for multiple proprietary data
feeds to obtain odd-lot quotations from several markets and
consolidating these feeds to create a more complete picture of the
market. See infra Sections VI.B.2(c), VI.B.3(a), and VI.B.3(b). In
addition, the proposed definition of round lot would help ensure
that market participants, including retail investors, would receive
information on smaller-sized orders in higher-priced stocks in a
context in which a trading or order routing decision can be
implemented and would receive more informative order execution
quality information. See infra Section III.C.1(d)(i) (discussing the
effect of the proposed definition of round lot on Rules 603(c) and
605).
---------------------------------------------------------------------------
The Commission preliminarily believes that, to address these and
other concerns, certain odd-lot quotation data should be required to be
disseminated as part of proposed core data so that it is made more
readily available to investors and market participants. The Commission
is proposing that this be accomplished by defining the term ``round
lot'' to include certain orders that currently are defined as ``odd-
lots.'' Given the prevalence of odd-lot quoting and trading,
particularly in higher-priced stocks, the absence of odd-lot quotation
data significantly reduces the comprehensiveness and usefulness of SIP
data.
The Commission preliminarily believes that the inclusion of odd-lot
quotations in proposed core data should be reasonably calibrated. The
Commission is preliminarily concerned that including all odd-lot
quotations could, as some Roundtable commenters suggested,\192\ burden
systems, increase complexity, and degrade the usefulness of information
in a manner that may not be warranted by the relative benefits of the
additional information to investors and market participants.\193\
---------------------------------------------------------------------------
\192\ See supra note 180 and accompanying text.
\193\ See infra note 195. Further, attempting to access orders
of insignificant notional value--the share price multiplied by the
number of shares in the order--could result in a situation where the
benefit associated with accessing additional liquidity may be offset
by the cost associated with signaling to other market participants
the presence of a large incoming order. See Securities Exchange Act
Release No. 78309 (July 13, 2016), 81 FR 49432, 49440 (July 27,
2016) (``[S]ophisticated market participants closely monitor order
and execution activity throughout the markets, looking for patterns
that signal the existence of a large institutional order, so that
they can use that information to their trading advantage . . .
Indeed, institutional customers have expressed concern that
excessive routing of their orders may increase the risk of
information leakage without a commensurate benefit to execution
quality.''). By limiting the quotation information that is added to
the proposed core data to orders of $1,000 dollars notional value or
more, as explained below, the proposed definition of round lot will
increase transparency into smaller-sized orders while reducing the
likelihood of information leakage.
---------------------------------------------------------------------------
Accordingly, under proposed Rule 600(b)(81) of Regulation NMS, a
``round lot'' would be defined as: (1) For any NMS stock for which the
prior calendar month's average closing price on the primary listing
exchange \194\ was $50.00 or less per share, an order for the purchase
or sale of an NMS stock of 100 shares; (2) for any NMS stock for which
the prior calendar month's average closing price on the primary listing
exchange was $50.01 to $100.00 per share, an order for the purchase or
sale of an NMS stock of 20 shares; (3) for any NMS stock for which the
prior calendar month's average closing price on the primary listing
exchange was $100.01 to $500.00 per share, an order for the purchase or
sale of an NMS stock of 10 shares; (4) for any NMS stock for which the
prior calendar month's average closing price on the primary listing
exchange was $500.01 to $1,000.00 per share, an order for the purchase
or sale of an NMS stock of 2 shares; and (5) for any NMS stock for
which the prior calendar month's average closing price on the primary
listing exchange was $1,000.01 or more per share, an order
[[Page 16742]]
for the purchase or sale of an NMS stock of 1 share.
---------------------------------------------------------------------------
\194\ The IPO price would be used in lieu of the prior calendar
month's average closing price on the primary listing exchange for
newly issued stocks. See proposed Rule 600(b)(81).
---------------------------------------------------------------------------
Table 1, below, shows the number of NMS stocks that would be in
each proposed round lot tier based on monthly average closing prices in
September of 2019, as well as the percent of overall average daily
volume (``ADV'') and notional value (``$ADV'') of each price group:
Table 1
----------------------------------------------------------------------------------------------------------------
Number of Percent of
stocks in Percent of $ADV, by
Stock price group stock price ADV, by price price group
group group (%) (%)
----------------------------------------------------------------------------------------------------------------
$0.00-$50.00.................................................... 7,188 75.02 31.70
$50.01-$100.00.................................................. 1,094 13.64 21.06
$100.01-$500.00................................................. 575 11.20 43.40
$500.01-$1,000.00............................................... 14 0.05 0.64
$1,000.01 +..................................................... 15 0.09 3.19
----------------------------------------------------------------------------------------------------------------
The Commission's proposed definition of round lot attempts to
balance the benefits of adding more quotation data regarding smaller-
sized orders to proposed core data against the concerns raised by some
Roundtable panelists and commenters that adding all odd-lot quotes to
proposed core data could increase its complexity and undermine its
usefulness.\195\ The proposed definition, in effect, limits the
quotation data that would be added to proposed core data to quotations
that represent a notional value of at least $1,000, which the
Commission preliminarily believes to be meaningful order size for
today's market participants.\196\
---------------------------------------------------------------------------
\195\ The proposed definition of round lot only includes a
subset of all odd-lot quotation data, namely, orders with a notional
value of at least $1,000. This would limit the number of data
messages that would be provided to market participants when compared
to providing all odd-lot quotation data. The Commission
preliminarily believes that the proposed definition would address
concerns regarding additional complexity and degradation of the
usefulness of the data. See infra Section VI.C.1(b)(i).
\196\ See infra Section VI.C.1.
---------------------------------------------------------------------------
A round lot is a standard unit of trading that traditionally has
reflected an order of meaningful size to market participants. Given the
per share price increases of certain securities, and the large number
of orders in sub-100 share sizes in today's market,\197\ the Commission
preliminarily believes that the current round lot size of 100 shares no
longer captures many orders of meaningful size. The number of shares in
an order, on its own, has become a less accurate way of distinguishing
orders of meaningful size from those of de minimis size. For example, a
100-share order for an $11 stock and a 10 share order for a $110 stock
both have a notional value of $1,100, but, under exchange rules and NMS
plans, only the former may be a round lot currently. The Commission
preliminarily believes that defining round lots based on a dollar value
would better reflect orders of meaningful size.\198\
---------------------------------------------------------------------------
\197\ See supra notes 163-169 and accompanying text.
\198\ Commenters to the SIP Odd Lot Initial Proposals have
suggested defining round lots based on share price. See Letter to
SIP Operating Committees from Hubert De Jesus, Managing Director,
Global Head of Market Structure and Electronic Trading, Blackrock,
and Joanne Medero, Managing Director, Global Public Policy Group,
Blackrock, regarding Odd Lots Proposal, 2 (Dec. 3, 2019), available
at https://www.theice.com/publicdocs/BlackRock_Odd_Lot_Proposal_December_3_2019.pdf (``The sizing of
round lots provides an intuitive mechanism for expanding odd lot
coverage because its designation as the normal unit of trading is
embedded in exchange rulebooks and market regulations. . . .
BlackRock believes that a data-driven redefinition of round lots to
scale lot size relative to security price would improve transparency
and promote fairer and more efficient markets.''); Letter from
Benjamin Connault, Economist, IEX Group, Inc., and Lucy Malcolm,
Associate General Counsel, IEX Group, Inc., to Operating Committees,
regarding Odd Lots Proposal and Round Lot Proposal, 2 (Nov. 18,
2019), available at https://www.theice.com/publicdocs/IEX_Letter_re-CTA-UTP_Odd-Lots_Proposal_20191118.pdf (``IEX strongly supports
reducing the round lot size for higher-priced securities.'').
---------------------------------------------------------------------------
Furthermore, higher odd-lot trading rates are associated with
higher-priced stocks,\199\ and, according to data provided in
connection with the Roundtable, odd-lot transaction sizes go down as
share price goes up.\200\ The proposed tiered, price-based round lot
definition is intended to reflect these market dynamics. More
specifically, a significant odd-lot transaction market--measured by
odd-lot trade frequency--emerges at approximately a $50 share price,
and 50% of the odd-lots traded in stocks priced between $50 and $250
are 20 shares or less.\201\ This corresponds, approximately, with the
proposed 20 share round lot category for stocks priced between $50.01
and $100.00 per share. Moreover, according to data provided in
connection with the Roundtable, 20, 10, 2, and 1 share odd-lot trade
sizes are among the most common, with approximately 2.8%, 5.1%, 5.3%,
and 11.7%, of odd-lot executions, respectively.\202\ The proposed
definition of round lot is intended to broadly reflect these key data
points in the context of a relatively simple, intuitive framework for
establishing round lot sizes and associated price thresholds.
---------------------------------------------------------------------------
\199\ See supra Section III.C.1(b) (stating that the daily
exchange odd-lot rate for the top decile of corporate stocks by
price exceeds the rate for all corporate stocks).
\200\ See RBC Letter at 5.
\201\ Id.
\202\ Deutsche Bank, Global Equities, There's More to Odd Lots
than High-Priced Stocks (June 25, 2019).
---------------------------------------------------------------------------
Moreover, a significant portion of the odd-lot transactions that
occur at a price better than the NBBO \203\ would be captured by the
proposed definition of round lot. Specifically, of the odd-lot
transactions executing at a price better than the NBBO during all of
the trading days in September 2019, approximately 38% of such
transactions and 61% of the odd-lot volume were in sizes that would be
round lots under proposed Rule 600(b)(81). For example, for those
stocks with an average prior calendar month's closing price on the
primary listing exchange equal to or greater than $500.01 and less than
$1,000, approximately 77% of all trades (99% of volume) in sizes less
than 100 shares that occurred at a price better than the prevailing
NBBO had a transaction size of 2 shares or more. Table 2 and Table 3,
below, show the portion of odd-lot trades and volume, respectively,
executed a price better than the prevailing NBBO that would be defined
as round lots under the proposal:
---------------------------------------------------------------------------
\203\ See supra Section III.C.1(b).
[[Page 16743]]
Table 2
----------------------------------------------------------------------------------------------------------------
Portion of all trades less than
100 shares, at a price better than
the prevailing NBBO, occurring in
Stock price group Proposed round lot definition a quantity that would be defined
as a round lot under the proposal
(%)
----------------------------------------------------------------------------------------------------------------
$0.00-$50.00............................. 100 shares....................... 0
$50.01-$100.00........................... 20 shares........................ 46
$100.01-$500.00.......................... 10 shares........................ 59
$500.01-$1000.00......................... 2 shares......................... 77
$1,000.01 or more........................ 1 share.......................... 100
----------------------------------------------------------------------------------------------------------------
Table 3
----------------------------------------------------------------------------------------------------------------
Portion of all volume transacted
in a quantity less than 100
shares, at a price better than the
Stock price group Proposed round lot definition prevailing NBBO, occurring in a
quantity that would be defined as
a round lot under the proposal
(%)
----------------------------------------------------------------------------------------------------------------
$0.00-$50.00............................. 100 Shares....................... 0
$50.01-$100.00........................... 20 Shares........................ 89
$100.01-$500.00.......................... 10 Shares........................ 95
$500.01-$1000.00......................... 2 Shares......................... 99
$1,000.01 or more........................ 1 Share.......................... 100
----------------------------------------------------------------------------------------------------------------
The proposed definition of round lot requires the round lot size of
an NMS stock to be based on the prior calendar month's average closing
price on the primary listing exchange for that stock (or the IPO price
if the prior calendar month's average closing price on the primary
listing exchange is not available).\204\ The Commission preliminarily
believes that the prior calendar month's average closing price on the
primary listing exchange is a reasonable metric to assess an NMS
stock's share price for purposes of determining the applicable round
lot size. The daily closing price is a widely followed indicator of a
stock's value that is often used to measure performance over time.\205\
Moreover, using a monthly average (rather than, e.g., each trading
day's closing price or a weekly average), would help ensure that round
lot sizes are based on current pricing information, while preventing
short-term price fluctuations from impacting the round lot size,
thereby avoiding unnecessary complexity and cost.
---------------------------------------------------------------------------
\204\ Specifically, the prior calendar month's average closing
price on the primary listing exchange would be the mean of the daily
closing prices on the primary listing exchange for all trading days
in the prior calendar month. For each NMS stock, the prior calendar
month's average closing price on the primary listing exchange would
only need to be computed at the beginning of each calendar month and
would be in effect for the rest of the month (i.e., it would not be
a ``rolling'' average requiring computation more frequently than
once per calendar month).
\205\ See Christopher Ting, Which Daily Price Is Less Noisy?,
Financial Management 35, no. 3 (2006): 81-95 (describing daily
closing price as a popular reference price, including for fund
managers to compute net asset values).
---------------------------------------------------------------------------
The proposed definition of round lot would impact other terms that
are currently defined in Regulation NMS, as well as the proposed
definition of core data (and its included terms), so that quotation
information in the proposed round lot sizes would be included in the
proposed definition of core data. Specifically, the definition of ``bid
or offer'' \206\ is based on round lots, and the definition of ``bid or
offer'' is reflected in the definition of ``best bid and best offer.''
\207\ Similarly, the definition of ``best bid and best offer'' is
reflected in the definition of ``national best bid and national best
offer.'' \208\ Therefore, the addition of the proposed definition of
round lot would impact the calculation of the NBBO by requiring that it
be calculated based upon the BBOs in the new round lot sizes. In
addition, the proposed definition of depth of book data refers to
``quotation size,'' which refers to ``bid or offer,'' so the quotation
data at the price levels that are proposed to be included in depth of
book data would include quotations in the new proposed round lot
sizes.\209\
---------------------------------------------------------------------------
\206\ See 17 CFR 242.600(b)(9).
\207\ See 17 CFR 242.600(b)(8).
\208\ See 17 CFR 242.600(b)(43).
\209\ Similarly, since ``transaction report'' is defined as ``a
report containing the price and volume associated with a transaction
involving the purchase or sale of one or more round lots of a
security,'' core data, as proposed, would include transaction
reports based on the new proposed round lot sizes. The Equity Data
Plans already collect and disseminate all odd-lot transaction
reports and last sale data. See supra notes 160-161 and accompanying
text. Accordingly, under proposed Rule 600(b)(19)(iv), which
incorporates data elements required by the NMS plan(s) into the
proposed consolidated market data, the SROs would continue to be
required to provide all odd-lot transaction reports and last sale
data as part of the proposed consolidated market data.
---------------------------------------------------------------------------
The proposed definition of ``round lot'' would also affect Rules
602, 603, 604, 605, 606, and 610 of Regulation NMS. Rule 602 governs
the dissemination of quotations in NMS securities. Specifically, Rule
602(a), among other things, requires SROs to have procedures to collect
and make available certain quotation information from their members and
make available their best bids and offers to vendors. As a result of
the proposed definition of ``round lot,'' the SROs would be required to
collect and make available quotations in the smaller round lot sizes
depending on the price of the NMS stock. The Commission preliminarily
believes the bids and offers collected and made available under Rule
602(a) should be in the proposed round lot sizes. As discussed above,
the Commission preliminarily believes that the proposed round lot sizes
represent orders of meaningful size to market participants and should
be collected, consolidated, and disseminated in proposed core data. To
effectively implement this, exchanges must be required to collect and
make available
[[Page 16744]]
quotations in these sizes under Rule 602(a).
In addition, Rule 602(b) provides that each ``responsible broker or
dealer'' shall communicate to its SROs its best bids and offers and
quotation sizes for a ``subject security.'' \210\ Thereafter, each
responsible broker or dealer is obligated to execute an order to buy or
sell a subject security, other than an odd-lot order, that is presented
to that responsible broker or dealer at a price at least as favorable
to such buyer or seller as the responsible broker's or dealer's
``published bid or published offer.'' \211\ In other words, the
responsible broker or dealer must be firm for its ``published bid or
published offer.'' \212\ As a result of the proposed definition of
round lot, responsible brokers or dealers will be required to
communicate bids and offers in the proposed round lot sizes and be firm
for such bids and offers. The Commission preliminarily believes that
the proposed round lot definition should apply to the obligations of
responsible brokers or dealers under Rule 602(b). As explained above,
the Commission preliminarily believes that the proposed round lot sizes
better reflect orders of meaningful size in today's markets. The
Commission also preliminarily believes that the objectives of Rule
602(b) of ensuring that broker-dealers disseminate their best quotes,
and are firm for such quotes, would be furthered by applying the
proposed definition of round lots such that those obligations would
apply to quotes of meaningful size.
---------------------------------------------------------------------------
\210\ ``Subject security'' means ``(i) With respect to a
national securities exchange: (A) Any exchange-traded security other
than a security for which the executed volume of such exchange,
during the most recent calendar quarter, comprised one percent or
less of the aggregate trading volume for such security as reported
pursuant to an effective transaction reporting plan or effective
national market system plan; and (B) Any other NMS security for
which such exchange has in effect an election, pursuant to
242.602(a)(5)(i), to collect, process, and make available to a
vendor bids, offers, quotation sizes, and aggregate quotation sizes
communicated on such exchange; and (ii) With respect to a member of
a national securities association: (A) Any exchange-traded security
for which such member acts in the capacity of an OTC market maker
unless the executed volume of such member, during the most recent
calendar quarter, comprised one percent or less of the aggregate
trading volume for such security as reported pursuant to an
effective transaction reporting plan or effective national market
system plan; and (B) Any other NMS security for which such member
acts in the capacity of an OTC market maker and has in effect an
election, pursuant to 242.602(a)(5)(ii), to communicate to its
association bids, offers, and quotation sizes for the purpose of
making such bids, offers, and quotation sizes available to a
vendor.'' 17 CFR 242.600(b)(77).
\211\ See Rule 602(b)(2), 17 CFR 242.602(b)(2); Regulation NMS
Adopting Release, supra note 10, at 37538. ``Published bid and
published offer means the bid or offer of a responsible broker or
dealer for an NMS security communicated by it to its national
securities exchange or association pursuant to Sec. 242.602 and
displayed by a vendor on a terminal or other display device at the
time an order is presented for execution to such responsible broker
or dealer.'' 17 CFR 242.600(b)(64).
\212\ 17 CFR 242.602(b)(2). See also Rule 600(b)(64) which
defines ``published bid and published offer.'' 17 CFR
242.600(b)(64).
---------------------------------------------------------------------------
Rule 603(c) governs the display of information with respect to
quotations for and transactions in NMS stocks. Specifically, Rule
603(c)(1) states that no securities information processor, broker, or
dealer shall provide, in a context in which a trading or order routing
decision can be implemented, a display of any information with respect
to quotations for or transactions in an NMS stock without also
providing, in an equivalent manner, a consolidated display--i.e., the
NBBO and consolidated last sale information \213\--for such stock.\214\
As a result of the proposed definition of ``round lot,'' a securities
information processor, broker, or dealer would be required to provide a
consolidated display that reflects smaller-sized orders in higher-
priced stocks. As discussed above, the Commission preliminarily
believes that the proposed round lot sizes represent orders of
meaningful size to market participants. The Commission also
preliminarily believes that the objective of Rule 603(c) of ensuring
that market participants receive basic quotation and transaction
information in a context in which a trading or order routing decision
can be implemented would be furthered to the extent that such
information is based on orders of meaningful size such as round lots as
proposed to be defined in this proposal.
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\213\ Rule 600(b)(14) defines ``consolidated display'' as ``(i)
The prices, sizes, and market identifications of the national best
bid and national best offer for a security; and (ii) Consolidated
last sale information for a security.'' 17 CFR 242.600(b)(14).
\214\ Rule 603(c)(2) further states that this provision does not
apply to a display of information on the trading floor or through
the facilities of a national securities exchange or to a display in
connection with the operation of a market linkage system implemented
in accordance with an effective national market system plan. 17 CFR
242.603(c)(2).
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Rule 604, which governs the display of customer limit orders for
NMS stocks, would also be affected by the proposed definition of round
lot. Rule 604(a)(1) requires each member of a national securities
exchange that is registered with that exchange as a specialist, or is
authorized by that exchange to perform functions substantially similar
to those of a specialist, to publish immediately a bid or offer that
reflects: (i) The price and the full size of each customer limit order
held by the specialist that is at a price that would improve the bid or
offer of such specialist in such security; and (ii) the full size of
each customer limit order held by the specialist that is priced equal
to the bid or offer of such specialist for such security, is priced
equal to the national best bid or national best offer, and represents
more than a de minimis change in relation to the size associated with
the specialist's bid or offer. Rule 604(a)(2) imposes similar
requirements on OTC market makers with respect to their customer limit
orders. The requirements of Rule 604 do not apply to customer limit
orders that, among other things, are odd-lots.\215\
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\215\ See 17 CFR 242.604(b)(3).
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Under the proposed definition of round lot, a specialist or OTC
market maker would have to include customer limit orders in the new
round lot sizes within its published bids and offers. Rule 604
currently applies to round lots and the Commission preliminarily
believes that Rule 604 should continue to use round lots, as proposed
to be defined, as the measure for customer limit orders that must be
reflected in a specialist or OTC market maker's published bid or offer.
The Commission preliminarily believes that the objectives of Rule 604
of ensuring that customers have the ability to effectively seek price
improvement through the dissemination of their limit orders by
specialists or OTC market makers would be furthered by applying the
proposed definition of round lot such that those obligations would
apply to customer limit orders of meaningful size. Therefore, the
Commission preliminarily believes that the customer limit order display
requirements of Rule 604 should apply to orders in the new proposed
round lot sizes.
Rule 605, which governs the disclosure of order execution quality
information, would also be affected by the proposed definition of round
lot because of the effect on the definition of NBBO. Rule 605 requires
market centers to publish monthly reports containing execution
statistics \216\ for certain NMS stock orders, including, but not
limited to, the ``average realized spread,'' \217\
[[Page 16745]]
``average effective spread,'' \218\ data on shares ``executed with
price improvement,'' \219\ and data on shares ``executed outside the
quote.'' \220\ The calculations of average realized spread and average
effective spread rely on the mid-point of the NBBO. Similarly, the
benchmark for price improvement statistics, as reflected in the
definitions of ``executed at the quote,'' \221\ ``executed with price
improvement,'' \222\ and ``executed outside the quote,'' \223\ is the
NBBO. As discussed above, since the NBBO will be based on the proposed
round lot sizes, any Rule 605 execution quality statistics that rely on
the NBBO as a benchmark would be affected by the proposed definition of
round lot on the NBBO.\224\ The Commission preliminarily believes that
order execution disclosures required under Rule 605 should be based on
the NBBO that reflects the new proposed round lot sizes. The NBBO is
currently based on round lots, and the proposed definition of round lot
would allow additional orders of meaningful size to determine the NBBO.
As a result, the execution quality and price improvement statistics
required under Rule 605 would be based upon an updated NBBO that the
Commission preliminarily believes is a more meaningful benchmark for
these statistics. Therefore, the Commission preliminarily believes that
the NBBO, as modified by the proposed definition of round lot, should
continue to be used as a basis for the statistics required under Rule
605.\225\
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\216\ Among other things, these reports must be ``categorized by
order size,'' which means ``dividing orders into separate categories
for sizes from 100 to 499 shares, from 500 to 1999 shares, from 2000
to 4999 shares, and 5000 or greater shares.'' 17 CFR 242.600(b)(11).
\217\ Rule 600(b)(7) defines ``average realized spread'' as
``the share-weighted average of realized spreads for order
executions calculated, for buy orders, as double the amount of
difference between the execution price and the midpoint of the
national best bid and national best offer five minutes after the
time of order execution and, for sell orders, as double the amount
of difference between the midpoint of the national best bid and
national best offer five minutes after the time of order execution
and the execution price; provided, however, that the midpoint of the
final national best bid and national best offer disseminated for
regular trading hours shall be used to calculate a realized spread
if it is disseminated less than five minutes after the time of order
execution.'' 17 CFR 242.600(b)(7).
\218\ Rule 600(b)(6) defines ``average effective spread'' as
``the share-weighted average of effective spreads for order
executions calculated, for buy orders, as double the amount of
difference between the execution price and the midpoint of the
national best bid and national best offer at the time of order
receipt and, for sell orders, as double the amount of difference
between the midpoint of the national best bid and national best
offer at the time of order receipt and the execution price.'' 17 CFR
242.600(b)(6).
\219\ Rule 600(b)(29) defines ``executed with price
improvement'' as ``for buy orders, execution at a price lower than
the national best offer at the time of order receipt and, for sell
orders, execution at a price higher than the national best bid at
the time of order receipt.'' 17 CFR 242.600(b)(29).
\220\ Rule 600(b)(28) defines ``executed outside the quote'' as
``for buy orders, execution at a price higher than the national best
offer at the time of order receipt and, for sell orders, execution
at a price lower than the national best bid at the time of order
receipt.'' 17 CFR 242.600(b)(28).
\221\ Rule 600(b)(27) defines ``executed at the quote'' as ``for
buy orders, execution at a price equal to the national best offer at
the time of order receipt and, for sell orders, execution at a price
equal to the national best bid at the time of order receipt.'' 17
CFR 242.600(b)(27).
\222\ Supra note 219.
\223\ Supra note 220.
\224\ See supra Section III.C.1(d)(i) (discussing the impact of
the proposed definition of round lot on other Regulation NMS defined
terms, such as the NBBO). As discussed above, the Commission
preliminarily believes that actual execution quality for retail
investors will be improved as a result of the inclusion of odd-lot
quotes in core data as a result of the better pricing that is often
reflected in odd-lots.
\225\ The NBBO used for purposes of Rule 605 would be calculated
by competing consolidators and self-aggregators using the proposed
round lot sizes. See supra Section III.C.1(d)(i). Under the
proposal, each competing consolidator and self-aggregator would be
required to calculate an NBBO consistent with the requirements set
forth in the NBBO definition found in Rule 600(b)(50). See proposed
Rule 614(d)(2). Accordingly, even though each competing consolidator
and self-aggregator would be calculating its own NBBO, the
calculation methodology for the NBBO would be consistent. Because
the NBBO would be calculated in a consistent manner, Rule 605
reports should still provide uniform comparisons of execution
quality.
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Rule 606, which requires broker-dealers to provide disclosure of
information regarding the handling of the broker-dealers' customers'
orders,\226\ would also be affected by the proposed definition of round
lot because of the effect on the definition of actionable indication of
interest.\227\ Specifically, Rule 606(b)(3) requires every broker-
dealer, upon a request of a customer who places a not held order, to
provide the customer with a standardized set of individualized
disclosures concerning the broker-dealer's handling of the orders. The
disclosures include, among other things, not held orders exposed by the
broker-dealer through actionable indications of interest, and the
venue(s) to which the actionable indications of interest were exposed,
provided that the identity of such venue(s) may be anonymized if the
venue is a customer of the broker-dealer. Rule 600(b)(1) defines an
actionable indication of interest as any indication of interest that
explicitly or implicitly conveys all of the following information with
respect to any order available at the venue sending the indication of
interest: (i) Symbol; (ii) side (buy or sell); (iii) a price that is
equal to or better than the national best bid for buy orders and the
national best offer for sell orders; and (iv) a size that is at least
equal to one round lot.\228\ As a result of the proposed definition of
round lot, there could be more actionable indications of interest in
higher priced securities. The Commission preliminarily believes that
applying the proposed round lot definition to actionable indications of
interest would further the objectives of Rule 606 regarding the
disclosure of order handling information--to make it easier for
investors to evaluate how their brokers handle orders and make more
informed decisions about brokers, and help investors to better
understand how broker-dealers route and handle orders and assess the
impact of broker-dealer routing decisions on order execution quality.
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\226\ Broker-dealers who engage in outsourced routing activity
are exempt from the requirement to comply with Rule 606(b)(3) until
April 1, 2020. See Securities Exchange Act Release No. 86874 (Sept.
4, 2019), 84 FR 47625 (Sept. 10, 2019).
\227\ See 17 CFR 242.600(b)(1). See also Securities Exchange Act
Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018)
(``Rule 606 Adopting Release'').
\228\ See id.
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In addition, Rule 610, which governs access to quotations, would be
affected by the proposed definition of round lot. Specifically, Rule
610(c) prohibits trading centers from imposing fees for the execution
of an order against a protected quotation or any other quotation that
is the best bid or offer of an SRO if the fees exceed certain limits
($0.003 per share for quotes of $1.00 or more and 0.3% of the quotation
price per share for quotes less than $1.00). As the Commission
explained in adopting Regulation NMS, ``the purpose of the fee
limitation is to ensure the fairness and accuracy of displayed
quotations by establishing an outer limit on the cost of accessing such
quotations,'' and Rule 610 ``thereby assures order routers that
displayed prices are, within a limited range, true prices.'' \229\ As a
result of the proposed definition of round lot, these fee limitations
would apply to quotes in the smaller round lot sizes because they would
apply to quotations that are the ``best bid or offer'' of an SRO. Rule
610(c) currently applies to quotations in round lots and the Commission
preliminarily believes that Rule 610(c) should apply to quotations in
the new proposed round lot sizes. The Commission preliminarily believes
that applying the fee limitations of Rule 610(c) to orders of
meaningful size, as reflected in the proposed definition of round lot,
would further that rule's objectives of ensuring the accuracy of
displayed quotations by establishing an outer limit on the cost of
accessing them.
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\229\ See Regulation NMS Adopting Release, supra note 10, at
37502.
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Finally, Rule 201 of Regulation SHO requires, among other things,
that trading centers have written policies and procedures reasonably
designed to prevent the execution or display of a short sale order of a
covered security at a price that is less than or equal to the current
national best bid if the price of that covered security decreases by
10% or more from the covered security's closing price as determined by
the listing market for the covered security as of the end of regular
trading hours on
[[Page 16746]]
the prior day.\230\ As a result of the proposed definition of round
lot, the national best bid would include orders in the proposed round
lot sizes. The Commission preliminarily believes that the objectives of
Rule 201 of restricting destabilizing short sale orders in rapidly
declining markets would be furthered by applying the proposed
definition of round lot such that bids of meaningful size would be
included within this restriction.\231\
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\230\ 17 CFR 242.201(b)(1)(i).
\231\ Securities Exchange Act Release No. 61595, supra note 75.
The Commission also preliminarily believes that instituting a
different round lot size for purposes of Rule 201 would introduce
unnecessary complexity into the markets. In particular, excessive
order routing complexity may be introduced if order routers are
allowed to execute a short sale order against certain bids (i.e.,
smaller round lots that are priced better than the 100-share
national best bid) but not allowed to execute a short sale order
against other bids (i.e., a 100-share bid).
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The Commission requests comment on the proposed definition of round
lot in proposed Rule 600(b)(81) and the inclusion of additional
quotation information for higher priced shares in proposed core data
that would result from this proposed definition. In particular, the
Commission solicits comment on the following:
8. Should odd-lot quotation data that is not currently reflected in
SIP data be incorporated into core data, as proposed, and, if so, what
is the best way to do so?
9. Should core data, as proposed, include quotation information for
smaller sized orders in higher priced stocks? Why or why not? Does
adding this quotation information enhance the usefulness of core data,
as proposed? Please explain. What kinds of market participants would
use this information? For what purposes? Would the inclusion of this
information have any negative or unintended consequences, such as
``information overload'' effects? Please explain.
10. Do commenters believe the Commission's proposed definition of
round lot is an effective way to incorporate this additional quotation
information into core data, as proposed? Why or why not? What effect
would the proposed definition have on systems capacity? Please explain
and provide data. Would the proposed definition affect market
complexity? Please explain. Do commenters believe that the proposed
definition of round lot appropriately balances the benefits of
providing additional quotation data to investors and other market
participants against potential costs such as additional system burdens
or increased data complexity? If not, please explain how this balance
could be more appropriately achieved. Specifically, please provide
details on the quantity of additional data or the increase in message
traffic that would be represented by the Commission's proposal and any
alternative proposals.
11. Are there alternative approaches, such as requiring all or a
subset of odd-lot quotations to be included in the proposed definition
of core data, or directly requiring all quotes over a certain notional
value to be included in the proposed definition of core data (rather
than indirectly as in the proposed definition of ``round lot'')? Please
describe any alternative approaches. What would be the advantages and
disadvantages of any alternative approaches?
12. Would the Commission's proposed definition of round lot capture
a significant portion of the odd-lot quotation activity that is
currently not included in SIP data? Is the definition appropriately
tailored to capture the odd-lot quotation information that would be
useful to market participants? If not, please identify and discuss
alternative approaches that might be more appropriate. For example, do
commenters believe round lot sizes and price intervals different from
those in the proposed definition would capture more useful odd-lot
quotation data? Please include data to support any suggested
alternative sizes or price intervals. Please also discuss any issues
related to increased order routing complexity or compliance with
Commission rules that might result from the proposed definition of
``round lot.''
13. Do commenters believe that odd-lot quotes should be aggregated
into the new round lot sizes at multiple price levels for the purposes
of calculating and disseminating the NBBO in the proposed definition of
core data? Why or why not? What are commenters' views on the specific
odd-lot aggregation methodology set forth in the proposed definition of
core data?
14. Do commenters agree with the Commission's proposal to require
odd-lot aggregation for purposes of protected quotations only at a
single price level? Please explain. Should odd-lots be aggregated only
at a single price level for purposes of determining the protected bid
and offer for stocks valued at $50.00 or less based on the prior
calendar month's average closing price on the primary listing exchange
even though the round lot for this price tier remains 100 shares (i.e.,
both the best bid and offer and protected bid and offer must be 100-
shares in this price tier)? Should a multiple price level aggregation
methodology for determining protected quotations apply to stocks valued
at $50.00 or less? Would there be any costs or negative effects of
having different odd-lot aggregation methodologies for stocks at
different price levels?
15. Is a price-based metric for determining round lot size an
appropriate metric for determining the proposed round lot tiers? Are
the proposed tiered round lot sizes appropriate? Why or why not? Should
the tiers be set at different intervals? Should there be more or fewer
tiers? For example, should the round lot size be one share for any NMS
stock for which the prior calendar month's average closing price on the
primary listing exchange was $500.01 or greater? Why or why not? Are
the round lot sizes appropriate for the share prices? If not, what is
the appropriate round lot size? Please provide empirical support for
any suggested alternatives.
16. Do commenters believe that a significant number of broker-
dealers do not currently subscribe to proprietary market data products,
including proprietary market data products that include odd-lot
quotations? If so, how many and what type of broker-dealers (e.g.,
executing broker-dealers, introducing broker-dealers, small broker-
dealers, large broker-dealers)? Are there specific types of proprietary
market data products to which any such broker-dealers do not subscribe?
If so, which types of proprietary market data products? Do any such
broker-dealers subscribe to proprietary data products from some
exchanges but not others?
17. Do commenters have views on the odd-lot proposal released by
the operating committees of the Equity Data Plans? \232\ What are the
advantages and disadvantages of the proposal by the Equity Data Plans
as compared to the Commission's proposed definition of round lot?
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\232\ See supra notes 181-185.
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18. Each of the proposed tiers represent a notional value of over
$1,000. Is this an appropriate threshold? Should it be higher or lower?
Please explain and submit data to support your analysis.
19. Do commenters believe that the prior calendar month's average
closing price on the primary listing exchange (or IPO price if the
prior calendar month's average closing price is not available) is an
effective way to assess the price of a stock for purposes of
determining its round lot size? Why or why not? Do commenters believe
it would be costly, difficult, or problematic for market participants
to adjust procedures and systems to take into account new round lot
sizes based
[[Page 16747]]
on the prior calendar monthly average closing price on the primary
listing exchange, or to account for a particular stock's potentially
different round lot size every month? Are there alternative time
periods over which a stock's price for purposes of assigning a round
lot size should be measured or alternative methods for measuring a
stock's price that the Commission should consider? When should a stock
whose price changes from one tier to another be assigned to a new round
lot size and for how long should it remain in that round lot size?
Would stocks priced near the thresholds that differentiate the round
lot tiers be affected by frequent shifts between round lot sizes?
Please explain.
20. During the month following the IPO of a newly listed stock,
should a minimum number of trading days be required to elapse before
the stock's round lot size is determined? If so, should the average
daily closing price on the primary listing exchange (or some other
metric) over the course of that number of trading days be used to
calculate the stock's price for purposes of determining its round lot
size? If so, how would the stock's round lot size be determined in the
interim?
21. Do commenters have views on how monthly average closing price
should be determined for stocks that are not traded every day? Should
the closing price of the most recent trading day on which there was a
trade be used each intervening day until the stock is traded again?
22. Do commenters believe that the impacts of the proposed
definition of round lot on the Commission rules described above are
appropriate? Why or why not? Will any SRO rules be affected? Please
explain. Specifically, please describe any effect of the proposed
definition of round lot on market maker quoting obligations under SRO
rules.
23. Should the proposed definition of round lot apply to Rules 602
and 604? Do commenters believe the applicability of the proposed
smaller round lot sizes to these rules will help foster more displayed
quotations of small orders? Do commenters believe this will result in a
significant tightening of quoted spreads?
24. Should the Commission amend Rule 605 in light of the proposed
round lot definition? Specifically, since the disclosures required by
Rule 605 must be ``categorized by order size,'' \233\ which currently
begins at 100 shares, should the definition of ``categorized by order
size'' be amended to require the relevant execution information to be
provided for sub-100 share orders, such as orders in the proposed round
lot sizes? Do commenters believe this would negatively or positively
affect the execution quality statistics provided pursuant to Rule 605?
More broadly, do commenters believe the proposed definition of round
lot would improve the actual prices provided to retail investors (as
distinct from the Rule 605 execution quality statistics)?
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\233\ See supra note 216.
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25. Should the proposed definition of round lot apply to Rule
610(c)? Specifically, should the fee limits under Rule 610(c) apply to
quotations in the proposed new round lot sizes? Would exchanges or
other trading centers increase access fees for the smaller round lots
if Rule 610(c) were limited to 100-share protected quotations? Why or
why not? Do commenters believe that market forces would provide
sufficient control over access fees for quotations in the smaller round
lots? Why or why not? Should Rule 610(c) be limited to the Commission's
definition of protected bid or protected offer, as amended? What would
be the benefits and costs of each approach?
26. Should the proposed definition of round lot apply to Rule 201
of Regulation SHO? Would the scope of Rule 201 be expanded as a result
of the proposed definition of round lot in a way that would
unnecessarily restrict the ability of market participants to sell
short? Will additional or excessive order routing complexity result
from the application of Rule 201 to quotations in the proposed smaller
round lot sizes? Should ``protected bid,'' as proposed to be amended,
rather than the national best bid be used as the reference price for
determining which short sales are required to be prevented under Rule
201? What would be the benefits and costs of each approach?
27. Do commenters believe that the proposed definition of round lot
would have any effect on an exchange's official closing prices? Would
the proposed definition of round lot have any effect on the pricing
practices of mutual funds and other investment companies, including the
calculation of net asset value or trading in portfolio securities?
Please explain the potential costs and benefits of any such effects.
28. Do commenters believe that the proposed definition of round lot
would affect the proportion of on-exchange or off-exchange liquidity?
Please explain.
(ii) Proposed Amendments to the Definition of Protected Bid or
Protected Offer
Rule 611 requires trading centers to have policies and procedures
that are reasonably designed to prevent trade-throughs on that trading
center of protected bids or protected offers in NMS stocks, subject to
specified exceptions.\234\ Rule 611 currently applies only to round
lots.\235\ If the definition of protected bid or protected offer were
left unmodified, the Commission's proposed definition of round lot
would result in an expansion of Rule 611 by requiring the protection of
quotations in the new smaller round lot sizes.
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\234\ Rule 611(a)(1). See also supra notes 115, 182. Rule
600(b)(81) defines ``trade-through'' as ``the purchase or sale of an
NMS stock during regular trading hours, either as principal or
agent, at a price that is lower than a protected bid or higher than
a protected offer.'' 17 CFR 242.600(b)(81).
\235\ Specifically, Rule 611 applies to ``protected quotations''
which means ``protected bid[s] or []protected offer[s].'' 17 CFR
242.600(b)(62). ``Protected bid or protected offer,'' as defined in
Rule 600(b)(61), refers to ``a quotation,'' defined in Rule
600(b)(66), which in turn refers to ``a bid or an offer,'' defined
in Rule 600(b)(9), which, as noted above, applies to round lots.
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Whether Rule 611 should be modified or repealed has been the
subject of much debate in recent years.\236\ Rule
[[Page 16748]]
611 was controversial when adopted,\237\ with many commenters either
opposing the rule entirely or advocating for exceptions, such as for
block trades or for those wishing to opt out of the Rule's
protections.\238\ In the years since, Rule 611 has continued to be the
subject of much debate, with some arguing that the rule has negatively
impacted equity market structure, others taking the position that any
benefits were achieved early on when the Rule induced widespread
automated quotations and connectivity, and yet others expressing the
view that the Rule continues to play an important role in supporting
best execution and retail investor confidence.\239\ Recently, a
Subcommittee of the Commission's Equity Market Structure Advisory
Committee advocated that the EMSAC recommend that the Commission
consider repealing Rule 611 on a pilot basis to test its impact.\240\
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\236\ For example, in its April 2017 memorandum discussing Rules
610 and 611 under the Exchange Act, the Equity Market Structure
Advisory Committee (``EMSAC'') Regulation NMS Subcommittee
(``Subcommittee'') stated that the industry largely remained divided
in its view on both the success and the continued need for the
trade-through and the locked and crossed markets provisions of
Regulation NMS. See Memorandum to EMSAC from the Subcommittee (Apr.
3, 2017), available at https://www.sec.gov/spotlight/emsac/emaac-regulation-nms-subcommittee-discussion-framework-040317.pdf. In the
memorandum, the Subcommittee recommended, among other things, that
the Commission consider repealing Rule 611 on a pilot basis, with
the goals of reducing excess complexity in the marketplace (as
demonstrated by venue fragmentation, order types, and routing
complexity); testing the hypothesis that Rule 611 has not created an
incentive for posting visible liquidity; and opening the markets to
competition and innovation over a longer time horizon, which the
Subcommittee believed is currently constrained due to the
proscriptive nature of Regulation NMS. The Subcommittee noted
several arguments supporting the removal of Rule 611, including the
apparent failure of Regulation NMS to increase the display of limit
orders in the marketplace and the increase in dark liquidity,
smaller trade sizes, and ``small'' venues; the de minimis benefit
from decreased trade-through rates, coupled with a relatively high
cost of trade-through compliance and the creation of new venues,
complex order types, and a need to focus on speed and other market
complexities as a requirement to manage queue priority; the fact
that competition among market centers is largely based on price and
speed; and the difficulty of setting the NBBO in active stocks
without the use of sophisticated price-sliding order types and
intermarket sweep orders. The Subcommittee also identified several
arguments in support of retaining Rule 611, including concerns,
especially among individual investors, of losing the best execution
backstop of the trade-through rule; the concern that individual
investors' non-marketable orders would lose trade-through
protection; and a concern regarding the amount of effort that could
be required to further monitor order routing behavior by agents in
the absence of a trade-through rule. The Subcommittee also expressed
the view that Rule 611 is too prescriptive as a best execution rule
and that concerns about best execution could be addressed more
effectively through enhanced guidance and procedures.
\237\ See Regulation NMS Adopting Release, supra note 10,
dissenting opinion.
\238\ See Regulation NMS Adopting Release, supra note 10, at
37505-37506, 37516, 37524-37526.
\239\ See Memorandum to EMSAC from the Subcommittee, supra note
236; Letter from Theodore R. Lazo, Managing Director and Associate
General Counsel, SIFMA to Brent J. Fields, Secretary, SEC, 5-7 (Mar.
29, 2017), available at https://www.sec.gov/comments/s7-21-16/s72116-1674693-149275.pdf (recommending that the SEC consider (1)
eliminating Rule 611 and relying on the duty of best execution to
maintain intermarket price protection, or (2) modifications to Rule
611 to add volume thresholds for protected quote status and a block
exception); Letter from William R. Harts, CEO, Modern Markets
Initiative, to Brent J. Fields, Secretary, SEC (Dec. 9, 2016),
available at https://www.sec.gov/comments/s7-21-16/s72116-9.pdf
(recommending that the SEC review Rule 611 to assess whether it
should be modified in light of the costs of compliance).
\240\ See Memorandum to EMSAC from the Subcommittee, supra note
236.
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In light of the concerns about the existing scope of Rule 611, the
Commission preliminarily believes that Rule 611 should not be extended
to smaller-sized quotations reflected in the proposed definition of
round lot. Moreover, the Commission preliminarily believes that
extending Rule 611 to the proposed new round lots is not necessary in
light of market developments since the adoption of Regulation NMS in
2005. While a substantial amount of trading in 2005 was conducted on
relatively slow manual markets,\241\ and was concentrated for any given
stock on its listing exchanges,\242\ nearly all trading now occurs on
fast, electronic markets (where even small degrees of latency affect
trading strategies) and is dispersed among a wide range of competing
market centers.\243\ In a market environment characterized by fast,
electronic trading across multiple venues, order routing and execution
strategies have become highly automated and increasingly sophisticated
at obtaining the best prices throughout the national market
system.\244\ In addition, best execution obligations apply to odd-lot
orders \245\ and would apply to bids and offers in the proposed round
lot sizes. The Commission preliminarily believes that these market
developments and improvements in trading and order routing technology,
in combination with their pursuit of best execution, would provide
sufficient incentives for market participants to engage with
meaningfully sized orders \246\ even in the absence of an expanded
order protection mandate under Rule 611.\247\ Further, the additional
pre-trade transparency that would be provided to these orders by their
inclusion in proposed core data should encourage market participants to
access this liquidity, as many market participants that access similar
data through proprietary feeds are already doing today.\248\ Moreover,
as discussed above, the execution quality and price improvement
statistics required under Rule 605 would be based upon an NBBO that
reflects the new proposed round lot sizes, and would provide investors,
including retail investors, with higher-quality information about their
order executions.
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\241\ See Equity Market Structure Concept Release, supra note
11, 75 FR at 3594 (``NYSE-listed stocks were traded primarily on the
floor of the NYSE in a manual fashion until October 2006. At that
time, NYSE began to offer fully automated access to its displayed
quotations.''). In contrast to NYSE, stocks listed on Nasdaq traded
in a highly automated fashion at many different trading centers
following the introduction of SuperMontage in 2002. See Securities
Exchange Act Release No. 46429, supra note 15; Steven Quirk, Senior
Vice President, Trader Group, TD Ameritrade, Testimony before the
U.S. Senate Committee on Homeland Security and Governmental Affairs,
Permanent Subcommittee on Investigations, Hearing on ``Conflicts of
Interest, Investor Loss of Confidence, and High Speed Trading in
U.S. Stock Markets'' (June 17, 2014), available at https://www.hsgac.senate.gov/imo/media/doc/STMT%20-%20Quirk%20-%20TD%20Ameritrade%20(June%2017%202014).pdf%20 (citing statistics
that average execution speed has improved by 90% since 2004--from 7
seconds to 0.7 seconds in 2014). Today, trading speed is measured in
microseconds and is moving towards nanoseconds. See, e.g., Vera
Sprothen, Trading Tech Accelerates Toward Speed of Light, Wall
Street Journal (Aug. 8, 2016), available at https://www.wsj.com/articles/trading-tech-accelerates-toward-speed-of-light-1470559173;
Alexander Osipovich, NYSE Aims to Speed Up Trading With Core Tech
Upgrade, Wall Street Journal (Aug. 5, 2019), available at https://www.wsj.com/articles/nyse-aims-to-speed-up-trading-with-core-tech-upgrade-11565002800.
\242\ See Securities Exchange Act Release No. 59039 (Dec. 2,
2008), 73 FR 74770, 74782 (Dec. 9, 2008) (File No. SR-NYSEArca-2006-
21) (NYSE's reported market share of trading in NYSE-listed stocks
declined from 79.1% in January 2005 to 30.6% in June 2008.); Equity
Market Structure Concept Release, supra note 11.
\243\ See Equity Market Structure Concept Release, supra note
11, 75 FR at 3598 (``The registered exchanges all have adopted
highly automated trading systems that can offer extremely high-
speed, or `low-latency,' order responses and executions.'').
\244\ See Equity Market Structure Concept Release, supra note
11, at 3594, 3598; Paul G. Mahoney and Gabriel Rauterberg, The
Regulation of Trading Markets: A Survey and Evaluation, University
of Virginia School of Law, Law and Economics Research Paper Series
2017-07, at 6 (Apr. 2017) (``Brokers overwhelmingly place orders and
trade through [NYSE's] electronic trading system . . . all markets
have come to rely more and more on using software to match buy and
sell orders automatically.'').
\245\ See Securities Exchange Act Release No. 37619A (Sept. 6,
1996) 61 FR 48290, 48305 and 48323 (Sept. 12, 1996) (``Order
Execution Obligations Release'') (``The market maker still will have
best execution obligations with respect to the remaining odd-lot
portion of the customer limit order.'').
\246\ See supra notes 196-198 and accompanying text (explaining
that the proposed definition of round lot is intended to reflect
orders of meaningful size for today's market participants).
\247\ Moreover, the Commission is aware that many market
participants today already utilize proprietary data feeds that
include odd-lots and, therefore, already have visibility into odd-
lot quotations priced better than the NBBO. Accordingly, since these
market participants already see and trade with quotations that are
priced better than protected quotations and have best execution
obligations, the greater transparency into smaller-sized orders that
the Commission is proposing is not dissimilar from the trading
environment that exists today for many market participants. See also
supra note 90.
\248\ See supra Section III.C.1(b) (stating that, during the
month of September 2019, approximately 51% of all trades executed on
exchange and approximately 14% of all volume executed on exchange in
corporate stocks occurred in odd-lot sizes and 43% of those odd-lot
transactions (representing approximately 39% of all odd-lot volume)
occurred at a price better than the NBBO); supra Tables 2 and 3
(showing the portion of all trades and volume less than 100 shares,
at a price better than the prevailing NBBO, occurring in a quantity
that would be defined as a round lot under the proposal).
---------------------------------------------------------------------------
Thus, the Commission is proposing to amend the definition of
``protected bid or protected offer'' in Rule 600(b)(61) by requiring
automated quotations that are the best bid or offer of a national
securities exchange or national securities association to be ``of at
least 100 shares'' in order to qualify as a protected bid or protected
offer. The proposed addition of this language will preserve the
existing scope of Rule 611 for the vast majority of NMS stocks.\249\
---------------------------------------------------------------------------
\249\ But see infra notes 250-252 and accompanying text
(discussing stocks that currently have non-100 share round lot
sizes). In addition, the proposed amendments to the definition of
protected bid or protected offer would also provide clarity to
market participants as to whether quotations in the new round lot
sizes are protected quotations for purposes of Rule 611, which is
responsive to comments made by some Roundtable panelists regarding
uncertainty as to whether additional odd-lot quotation information
would be protected under Rule 611. See supra note 179 and
accompanying text.
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[[Page 16749]]
As noted above, exchange rules generally permit the exchange to
assign a round lot size other than 100 shares.\250\ As of market close
on August 8, 2019, 12 stocks had a round lot size other than 100
shares,\251\ and because they are round lots, they are protected
quotations to the extent that they satisfy the other requirements in
the definition.\252\ Therefore, Rule 611 currently applies to orders of
those stocks in their non-100 share round lot sizes. The proposed
amendment to the definition of protected bid and protected offer would
mean that the smaller round lot orders in these 12 stocks would no
longer be protected quotations, and therefore they would no longer be
subject to Rule 611. The Commission preliminarily believes that the
rule should be consistently applied to protected quotations of 100
shares or more (or quotations of fewer than 100 shares that can be
aggregated at a single price into 100 shares or more). The Commission
preliminarily believes that a single test for the applicability of the
protected quotation definition, without special exceptions for certain
stocks, would be simpler, would facilitate compliance with Rule 611,
and would set consistent expectations among market participants.
Further, the Commission preliminarily believes that competition among
broker-dealers, improvements in trading and order routing
technology,\253\ and the continued applicability of best execution
requirements to sub-100 share orders of these stocks would provide
sufficient incentives for the attainment of high-quality executions of
such orders even in the absence of trade-through protection pursuant to
Rule 611.\254\
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\250\ See supra note 141.
\251\ Of the 12 stocks that had non-100 share round lot sizes,
ten had a round lot of ten, and two had a round lot of one. Seven
are common stocks, and five are preferred stocks. Prices of these
stocks ranged from about $27 to over $300,000. See supra note 141
and accompanying text. Currently, each of these stocks is thinly-
traded. For example, during the third quarter of 2019, each of these
stocks had: An average daily share volume below 40,000, with most
trading only hundreds of shares a day; an average trade count of
less than 3,200, with some trading only dozens of times per day; and
an average daily dollar volume of less than $130 million, with most
trading on average less than $1 million per day.
\252\ A ``protected bid or protected offer'' is defined as a
``quotation in an NMS stock that (i) is displayed by an automated
trading center; (ii) is disseminated pursuant to an effective NMS
plan; and (iii) is an automated quotation that is the best bid or
best offer of a national securities exchange . . . or national
securities association.'' Rule 600(b)(61), 17 CFR 242.600(b)(61).
``Protected quotation means a protected bid or protected offer.''
Rule 600(b)(62), 17 CFR 242.600(b)(62). As explained above,
``protected quotations'' must be round lots, and exchange rules
permit round lot sizes other than 100, so quotes in these stocks in
their non-100 round lot sizes are ``protected quotes.'' See supra
notes 141, 235. Similarly, other rules in Regulation NMS that apply
to round lots as a result of references to ``bid or offer'' or other
defined terms that directly or indirectly reference ``round lot,''
such as Rules 602, 603, 604, and 605, also apply to 1 or 10 share
round lot quotes of these stocks.
\253\ See supra notes 241-244 and accompanying text.
\254\ See supra note 245.
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The Commission is also proposing to delete the references to ``The
Nasdaq Stock Market, Inc.'' in the definition of protected bid or
protected offer. Since the Nasdaq Stock Market is now a national
securities exchange, that language is redundant.
Finally, the locked and crossed markets restrictions of Rule 610
are based on the term ``protected quotation.'' Specifically, Rule
610(d) requires each national securities exchange and national
securities association to establish, maintain, and enforce rules that,
among other things, require its members to reasonably avoid displaying
quotations that lock or cross any protected quotation in an NMS stock
and that prohibit its members from engaging in a pattern or practice of
displaying quotations that lock or cross any protected quotation in an
NMS stock, absent an applicable exception. Under the proposed
amendments to the definition of protected bid or protected offer,
``protected quotation'' will refer to displayed, automated quotations
that are the best bids or offers of at least 100 shares of a national
securities exchange or association. As a result, quotations in the new,
smaller proposed round lot sizes would not be subject to Rule 610(d)
and could be locked or crossed.\255\
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\255\ For example, pursuant to the proposed definitions of round
lot and protected bid or offer, a 20 share buy order for a stock
that had an average monthly closing price of between $50.01 and
$100.00 could be locked or crossed.
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As with Rule 611, the locked and crossed markets provisions of Rule
610 continue to be the subject of much debate, with some arguing that
they create additional market complexity without a clear benefit.\256\
Recently, a Subcommittee of the Commission's EMSAC advocated that the
EMSAC recommend that the Commission consider repealing the locked and
crossed markets provisions of Rule 610 on a pilot basis to test its
impact, in conjunction with an access fee pilot.\257\ In light of the
concerns about the existing scope of the locked and crossed markets
provisions of Rule 610, the Commission preliminarily believes that such
provisions should not be extended to smaller sized quotations reflected
in the proposed definition of round lot. In addition, the Commission
preliminarily believes that market forces, such as the economic
incentives of market participants to obtain the best price and resolve
locked or crossed markets, as well as improvements in trading and order
routing technology,\258\ are sufficient to mitigate excessive locking
or crossing of quotations in the new round lot sizes and to resolve
such locked or crossed markets efficiently.
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\256\ See Memorandum to EMSAC from the Subcommittee, supra note
236; Letter from Joanna Mallers, Secretary, FIA Principal Trading
Group, to Brent J. Fields, Secretary, SEC, 2-3 (Mar. 13, 2017),
available at https://www.sec.gov/comments/s7-21-16/s72116-1686170-149597.pdf (recommending the Commission review Rule 610(d) in light
of increased complexity associated with restrictions on locking and
crossing quotations); Letter from William R. Harts, CEO, Modern
Markets Initiative, to Brent J. Fields, Secretary, SEC (Dec. 9,
2016), available at https://www.sec.gov/comments/s7-21-16/s72116-9.pdf (recommending the Commission review the prohibition on locking
or crossing quotations in light of the unnecessary complexity and
investor confusion).
\257\ See Memorandum to EMSAC from the Subcommittee, supra note
236.
\258\ See supra notes 241-244 and accompanying text.
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The Commission requests comment on the proposed amendments to the
definition of protected bid or protected offer in proposed Rule
600(b)(69). In particular, the Commission solicits comment on the
following:
29. Do commenters believe that the Commission's proposed amendments
to the definition of protected bid or protected offer are an effective
way to continue to require order protection for 100 share orders but
not for smaller orders, or would an alternative be better? Please
explain.
30. Do commenters believe that the definition of NBBO should
reflect the proposed round lot sizes or should it remain consistent
with the 100-share protected quotation? Why or why not?
31. Do commenters believe that Rule 611 should be extended to
orders in the smaller round lot sizes set forth in the proposed
definition of round lot? Why or why not? If Rule 611 were to be
extended to the proposed smaller round lot sizes, would there be any
negative or unintended consequences? Please explain in detail.
32. Do commenters believe it would be costly for market
participants to adjust procedures and systems to comply with Rule 611
and prevent trade-throughs at the smaller round lot sizes? Please
describe the necessary changes and any consequent costs in detail.
33. Do commenters believe it would be costly for market
participants to
[[Page 16750]]
adjust procedures and systems to comply with Rule 611 and prevent
trade-throughs at 100 share order sizes when the new round lot size may
be smaller? Please describe the necessary changes and any consequent
costs in detail. Please also discuss how this differs meaningfully from
today, if at all, for market participants that are currently using
proprietary data feeds that include odd-lot information.
34. Do commenters believe that the best execution obligation,
combined with the greater transparency that the Commission is proposing
for smaller-sized orders in higher-priced stocks, is sufficient, in the
absence of the order protection rule, for market participants to engage
with the liquidity represented by orders in the proposed round lot
sizes to obtain the best execution for smaller-sized customer orders?
35. Should the Commission maintain the applicability of Rule 611 to
the small number of stocks \259\ that currently have a round lot other
than 100? Why or why not?
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\259\ See supra note 141.
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36. Do commenters agree with the proposal not to extend Rule 610's
locking and crossing requirements to orders with the proposed smaller-
round lot sizes? If not, why not? Do commenters have views or data on
the frequency with which smaller-sized orders would be locked or
crossed? Please explain. Would it be costly to apply locking and
crossing prevention mechanisms to the new round lot sizes? Please
explain.
(iii) Proposed Amendments to the Definition of National Best Bid and
National Best Offer
Today, the NBBO is calculated by the exclusive SIPs and
disseminated over the consolidated tapes.\260\ The NBBO is defined in
Rule 600(b)(43) as the best bid and best offer \261\ for an NMS
security \262\ that is calculated and disseminated on a current and
continuous basis by the exclusive SIPs. The definition further provides
that if two or more market centers transmit identical bids or offers
for an NMS security, the best bid or best offer shall be determined by
ranking all identical bids or offers first by size (giving the highest
ranking to the bid or offer associated with the largest size) and then
by time (giving the highest ranking to the bid or offer received first
in time). Accordingly, the NBBO reflects one market center that is the
best bid and one market center that is the best offer across all market
centers.
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\260\ In addition, market participants that purchase exchange
proprietary feeds may calculate their own NBBOs for their internal
purposes.
\261\ As discussed above, the best bid or best offer for an NMS
stock of an exchange may contain multiple prices that are better
than the best bid or best offer to the extent that an exchange
aggregates better priced odd-lots and provides them to the exclusive
SIPs at the least aggressive price that forms a round lot.
\262\ The definition of NMS security is broader than NMS stock
and includes ``any security or class of securities for which
transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan, or an effective
national market system plan for reporting transactions in listed
options.'' 17 CFR 242.600(47).
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As noted above, the proposed round lot definition would affect the
calculation of the NBBO by requiring that the best bids and offers
transmitted by the SROs to be in the new round lot sizes.\263\
Accordingly, the proposed definition of round lot, if adopted, would
result in an NBBO that reflects the smaller round lot sizes.
---------------------------------------------------------------------------
\263\ See supra Section III.C.1(d)(i).
---------------------------------------------------------------------------
The proposed definition of round lot does not necessitate changes
to the definition of NBBO. However, as discussed further below, the
Commission is proposing a decentralized consolidation model where
competing consolidators and self-aggregators would replace the
exclusive SIPs. Therefore, the Commission is proposing amendments to
the definition of NBBO to reflect that competing consolidators and
self-aggregators, rather than the exclusive SIPs, would be calculating
the NBBO in the proposed decentralized consolidation model. In
addition, to accommodate this proposed decentralized consolidation
model, the Commission is proposing to bifurcate the NBBO definition
between NMS stocks and other NMS securities (i.e., listed options) to
reflect that the proposed decentralized consolidation would apply only
with regard to NMS stocks, and therefore the exclusive SIP for options
would continue to be responsible for calculating and disseminating the
NBBO in listed options.\264\ The proposed changes to the definition of
NBBO would not impact the manner in which the NBBO is calculated for
NMS stocks or listed options.
---------------------------------------------------------------------------
\264\ The competing consolidator model described herein
addresses the current market data infrastructure for NMS stocks and
not the exclusive SIP for options. See infra note 417.
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Specifically, the NBBO for an NMS stock would be the best bid and
best offer for such stock that is calculated and disseminated on a
current and continuing basis by a competing consolidator or calculated
by a self-aggregator.\265\ The Commission is proposing to remove
references to a plan processor for NMS stocks because under the
proposed decentralized consolidation model, there would not be plan
processors. Further, competing consolidators and self-aggregators would
have to calculate the NBBO in the same manner as it is calculated by
the exclusive SIPs today, including the method currently set forth in
the definition of NBBO for determining the best bid or offer in the
event that two or more market centers transmit identical bid or offer
prices.
---------------------------------------------------------------------------
\265\ See infra notes 499-502 and accompanying text.
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The Commission requests comment on the proposed amendments to the
definition of national best bid and national best offer in proposed
Rule 600(b)(50). In particular, the Commission solicits comment on the
following:
37. What are commenters' views on the proposed amendments to the
definition of national best bid and national best offer? Do the
proposed amendments make appropriate adjustments to the definition to
accommodate the proposed introduction of a consolidated market data
distribution model with competing consolidators and self-aggregators?
Are any additional amendments needed, whether to the definition of NBBO
or to other provisions? Please be specific.
2. Depth of Book Data
Core data currently lacks quotation information in NMS stocks
beyond the best round lot quotes of each SRO, commonly referred to as
the ``top of book.'' However, as regulatory changes and market
developments, such as decimalization, have increased the significance
of information on quotes away from the best prices,\266\ some have
suggested that core data be expanded to include certain depth of book
data (i.e., quotations and aggregate size at prices outside the
BBO).\267\
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\266\ See infra notes 276-277 and accompanying text.
\267\ See, e.g., Roundtable Day One Transcript at 120 (Jeff
Brown, Charles Schwab) (``So our recommendation for this panel and
for this day is that the SEC move to impose . . . depth of book on
the SIP.''). Suggestions for enhancing core data, however, have
failed to garner the support by participants to the Equity Data
Plans necessary for action. See infra Section III.C.2(c); supra note
164 and accompanying text; supra Section II.A (discussing the
distinction between the exclusive SIPs and proprietary DOB data
feeds and market participants' views regarding their ability to use
core data to be competitive in today's markets and provide best
execution to their customers). See also, e.g., NYSE Sharing Data-
Driven Insights--Stock Quotes and Trade Data: One Size Doesn't Fit
All (Aug. 22, 2019), available at https://www.nyse.com/equities-insights#20190822 (proposing to replace the exclusive SIP feeds with
three tiered levels of service, including certain DOB data, based on
the needs of specific types of investors).
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The Commission is proposing to define core data to include certain
[[Page 16751]]
``depth of book data.'' Specifically, depth of book data would be
defined to include aggregated quotes at each price between the best bid
(and best offer) and the protected bid (and protected offer) (if
different), as well as the five price levels above the protected offer
and below the protected bid.\268\ The Commission preliminarily believes
this approach would approximate the level of liquidity information
available to market participants at the best bid or offer prior to
decimalization and enable market participants to use proposed core data
to trade in a more informed and effective manner.\269\
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\268\ See supra Section III.C.1(d).
\269\ Id. See also infra notes 310-313 and accompanying text
(describing how depth of book data can be used to optimize order
placement and to provide directional signals regarding near-term
market movements.).
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(a) Regulatory Background
Regulation NMS and the Equity Data Plans neither require nor
prohibit the collection, consolidation, or dissemination of depth of
book data. Rule 602 requires that national securities exchanges and
associations make available their best bids and best offers, which are
defined in Rule 600(b)(8) as the highest priced bid and lowest priced
offer. Similarly, Rule 603(b) requires the dissemination of an NBBO,
and the definition of NBBO in Rule 600(b)(43) refers to best bids and
best offers. Market participants that want depth of book data for
trading must rely upon the proprietary feeds offered by the exchanges,
which include varying degrees of depth of book data.\270\
---------------------------------------------------------------------------
\270\ For example, CBOE One Premium offers five levels of
aggregated depth while NYSE XDP Integrated, Nasdaq Total View, and
CBOE Depth offer complete depth of book.
---------------------------------------------------------------------------
In adopting Regulation NMS, the Commission considered the scope of
quotations to which trade-through protection should apply under Rule
611. The Commission decided to apply Rule 611 to protected quotations
\271\ but not to depth of book quotations.\272\ Similarly, the
Commission determined not to require that depth of book quotations be
included in core data, reasoning that investors who needed depth of
book data would be able to obtain that data from markets or third-party
vendors.\273\ However, the Commission acknowledged that depth of book
data is important to investors and updated former Exchange Act Rule
11Ac1-2 (redesignated as Rule 603) to address the independent
dissemination of depth of book and other market data by the
exchanges.\274\ After the adoption of Regulation NMS in 2005, exchanges
began to sell their proprietary data products separately from the core
data required by Rule 603(b) of Regulation NMS.\275\
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\271\ See supra note 115.
\272\ Specifically, the Commission considered a ``Voluntary
Depth Alternative'' under which, in addition to protecting the best
bids and offers of each SRO (the Market BBO Alternative), depth of
book quotations that markets voluntarily disseminate in the
consolidated quotations stream would be protected as well. See
Regulation NMS Adopting Release, supra note 10, at 37529. The
Commission decided to adopt the Market BBO Alternative, explaining
that it would represent a major step toward achieving the objectives
of intermarket price protection but with fewer of the costs and
drawbacks associated with the Voluntary Depth Alternative. The
Commission noted that the Market BBO Alternative will promote best
execution for retail investors on an order-by-order basis, given
that most retail investors justifiably expect that their orders will
be executed at the NBBO and that the Market BBO Alternative would
not require an expansion of the data disseminated through the
exclusive SIP Plans. Id. at 37530.
\273\ See Regulation NMS Adopting Release, supra note 10, at
37567. In making that determination, the Commission stated that this
would be ``a competition-driven outcome [that] would benefit
investors and the markets in general.'' See id. at 37530.
\274\ See Regulation NMS Adopting Release, supra note 10, at
37565; 17 CFR 242.603(a)(2) (an exchange ``that distributes
information with respect to quotations for or transactions in an NMS
stock to a securities information processor, broker, dealer, or
other persons shall do so on terms that are not unreasonably
discriminatory''). While the pre-Regulation NMS rules did not
prohibit the independent distribution of quotes by individual SROs,
Rule 603(a) was intended to impose ``uniform standards'' to such
distribution (i.e., the ``fair and reasonable'' and ``not
unreasonably discriminatory'' standards). See Regulation NMS
Adopting Release, supra note 10, at 37569. Prior to Regulation NMS,
however, SROs and their members were prohibited from disseminating
their trade reports independently. Id. at 37589.
\275\ See supra note 19 and accompanying text.
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(b) Market Evolution
The decimalization of securities pricing in 2001, and the resulting
shift away from the larger fractional quoting and trading
increments,\276\ had significant implications for the amount of
liquidity available at the top of book, the transparency of order book
liquidity, and the need for market participants to obtain depth of book
information. With the larger quoting and trading increments associated
with fractional quoting, such as one-sixteenth of a dollar, trading
interest was distributed across fewer price points and more liquidity
(i.e., aggregate order interest) was concentrated at the top of book.
For example, as the Commission noted in adopting Regulation NMS,
``depth-of-book quotations have become increasingly important as
decimal trading has spread displayed depth across a greater number of
price points.'' \277\
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\276\ See Securities Exchange Act Release No. 42914 (June 8,
2000), 65 FR 38010 (June 19, 2000) (directing the National
Association of Securities Dealers and the national securities
exchanges to act jointly in developing a plan to convert their
quotations in equity securities and options from fractions to
decimals).
\277\ Regulation NMS Adopting Release, supra note 10, at 37592;
see also Securities Exchange Act Release No. 50870 (Dec. 16, 2004),
69 FR 77424 (Dec. 27, 2004) (``the initiation of trading in penny
increments in 2001 transformed the equity markets. The number of
quotation updates increased, and the quoted size at any particular
price level dropped'').
---------------------------------------------------------------------------
Since the implementation of decimalization, market participants
have raised concerns about reduced price transparency and difficulty
executing large transactions at the best prices due to lower
concentrations of trading interest at the top of book.\278\ In the
Report to Congress on Decimalization, required under Section 106 of the
Jumpstart Our Business Startups Act, Commission staff noted academic
literature that found that quoted depth, on average, declined after
decimalization.\279\
---------------------------------------------------------------------------
\278\ See, e.g., Regulation NMS Adopting Release, supra note 10,
at 37529 (noting a comment from the Consumer Federation of America
concerning ``complaints that decimal pricing has reduced price
transparency because of the relatively thin volume of trading
interest displayed in the best bid and offer''); Letter from Craig
S. Tyle, General Counsel, Investment Company Institute, to Jonathan
G. Katz, Secretary, Commission (Nov. 20, 2001), available at https://www.sec.gov/rules/concept/s71401/tyle1.htm#P41_3920 (``As we have
previously noted, the reduction in quoted market depth as the
minimum quoting increment has narrowed to a penny has adversely
affected institutional investors' ability to execute large orders .
. . Preliminary data has shown that, post-decimalization, it has
become more difficult for large institutional orders to be filled
entirely at the inside.'').
\279\ Report to Congress on Decimalization, 10-11 (July 2012),
available at https://www.sec.gov/news/studies/2012/decimalization-072012.pdf. Cumulative depth at competitive prices did not change,
however. Id. See also Phil MacKintosh, What is Liquidity? (Dec. 12,
2019), available at https://www.nasdaq.com/articles/what-is-liquidity-2019-12-12 (stating that while smaller quantity of the
NBBO and smaller average trade sizes may suggest falling liquidity,
depth of book liquidity suggests that overall liquidity is stronger
than ever before); Citadel Securities Market Lens--Has Market
Structure Evolution Made Equities Less Liquid (Sep. 2019), available
at https://s3.amazonaws.com/citadel-wordpress-prd102/wp-content/uploads/sites/2/2019/09/27211934/Market-Lens-Has-Market-Structure-Evolution-Made-Equities-Less-Liquid.pdf (analyzing full depth of
displayed liquidity from the exchanges' proprietary data feeds and
finding that liquidity remained stable over the past eight years).
---------------------------------------------------------------------------
(c) Comments and Roundtable Discussion
These developments have led market participants to call for depth
of book data to be distributed through the Equity Data Plans. In
connection with the Roundtable, several panelists and commenters
recommended adding depth of book data to SIP data or otherwise
emphasized their views about
[[Page 16752]]
the importance of depth of book data.\280\ One panelist stated that the
exclusive SIPs could be upgraded and made ``relevant again'' by adding
depth of book data, which would benefit retail investors by giving them
information on which direction a stock may be moving and what type of
order they may need to use.\281\ Another panelist stated that both his
firm and the brokers it employs cannot rely solely on SIP data, as they
believe they need depth of book data to have a full view of the market
and to trade competitively, particularly with respect to large
orders.\282\ One commenter stated that the Commission should require
depth of book data to be included in SIP data and recommended adding at
least five levels of depth.\283\
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\280\ See Roundtable Day Two Transcript at 245 (Tyler Gellasch,
Healthy Markets) (stating that the exclusive SIPs should include
depth of book data (as well as auction imbalance data and odd-lot
quote data)); Roundtable Day One Transcript at 228-29 (Joseph Wald,
Clearpool Group) (explaining that the lack of depth of book and
auction data on the exclusive SIP feeds needs to be addressed);
Letter to Brent J. Fields, Secretary, Commission, from Joe Wald,
Chief Executive Officer, The Clearpool Group (Oct. 23, 2018)
(``Clearpool Group Letter'') (``We believe that certain information
currently provided through proprietary data feeds, for example,
imbalance data and order depth-of-book information, should be
considered core data and provided to all market participants through
the SIP.''); MFA and AIMA Letter at 6 (stating that its members
``purchase proprietary market data (e.g., depth-of-book and
imbalance data) from exchanges for a variety of reasons, including
strategy implementation, risk-analysis, best-execution, less latency
than other sources and to fulfill fiduciary obligations.'').
\281\ See Roundtable Day One Transcript at 119-120 (Jeff Brown,
Charles Schwab).
\282\ See Roundtable Day One Transcript at 136, 165-66 (Simon
Emrich, Norges Bank Investment Management).
\283\ See SIFMA Letter II at 2 (stating that retail firms
generally use one level of depth for order routing and institutional
firms generally use up to five levels of depth (sometimes as much as
ten) and that the Commission should balance the need for more
comprehensive information with the additional cost and potential
increase in latency from including additional quotes, as well as
adjust the exclusive SIP subscriber fee model to account for firms
that do not need depth of book data).
---------------------------------------------------------------------------
Some panelists and commenters went further, suggesting that depth
of book data (or data provided on the exchange proprietary feeds more
generally) is needed to fulfill best execution obligations.\284\ One
panelist stated that paying for full depth of book data from each
exchange is essential to effective order routing and to fulfilling best
execution obligations, noting that if his firm did not get depth of
book--top of book and many levels away--it could not provide best
execution to its clients.\285\ Another commenter noted that broker-
dealers do not have the option to forgo buying proprietary data because
SIP data has less content and is slower, and that, even if the
Commission provided a safe harbor that best execution requirements may
be satisfied by relying on SIP data, buying proprietary data would
still be necessary from a business perspective.\286\
---------------------------------------------------------------------------
\284\ See Roundtable Day One Transcript at 192-193 (Jamil
Nazarali, Citadel Securities) (stating that proprietary feeds are
required for best execution); Roundtable Day One Transcript at 48
(Prof. Hal Scott, Committee on Capital Markets Regulation) (making a
similar statement); Roundtable Day Two Transcript at 58-59 (Prof.
Robert Bartlett, UC Berkeley) (making a similar statement); MFA and
AIMA Letter at 3-4 (stating that broker-dealers that do not have
depth of book information will be challenged to provide best
execution).
\285\ See Roundtable Day One Transcript at 27, 57-58, 73 (Doug
Cifu, Virtu Financial); Letter to Brent J. Fields, Secretary,
Commission, from Douglas A. Cifu, Chief Executive Officer, Virtu
Financial Inc., 4 (Oct. 23, 2018) (``Virtu Letter I'') (``Simply
put, Virtu could not fulfill its obligations to its myriad of retail
customers and institutional clients without full depth of book
market data feeds and robust exchange connectivity features that the
SIP feeds alone do not offer.'').
\286\ See Letter to Brent J. Fields, Secretary, Commission, from
Mehmet Kinak, Global Head of Systematic Trading and Market
Structure, and Jonathan D. Siegel, Vice President--Senior Legal
Counsel, T. Rowe Price, 2 (Jan. 10, 2019) (``T. Rowe Price
Letter'').
---------------------------------------------------------------------------
However, some panelists were reluctant to embrace the idea of
adding depth of book data to SIP data and pointed out possible negative
impacts from doing so. One panelist representing a retail brokerage
firm stated that depth may be important for active traders and that his
firm has platforms that incorporate it but added that depth is less
important for retail investors who trade infrequently and that some of
his firm's platforms do not incorporate it.\287\ This panelist also
stated that there could be technological challenges and latency
implications (i.e., added latency associated with the need to process
additional message traffic) to adding depth of book data to SIP
data.\288\ Furthermore, several panelists noted that adding depth of
book data to the SIP data, particularly on an order-by-order basis,
could be confusing, but some suggested that the data could be
aggregated at certain price levels or otherwise simplified.\289\
---------------------------------------------------------------------------
\287\ See Roundtable Day One Transcript at 162-163 (Matt
Billings, TD Ameritrade).
\288\ Id.; see also Roundtable Day Two Transcript at 74 (Michael
Blaugrund, NYSE).
\289\ See Roundtable Day One Transcript at 227 (Chris Isaacson,
Cboe) (stating that he would not go as far as to add depth of book
data to the consolidated market data, stating that doing so could
potentially cause confusion, and emphasizing the difference between
the plan processors and non-SIPs); Roundtable Day One Transcript at
230 (Ronan Ryan, IEX) (stating that adding depth data could be
confusing, but suggesting that perhaps there could be simpler
alternatives, such as an aggregated size at each price level rather
than order-by-order); Roundtable Day One Transcript at 232 (Michael
Friedman, Trillium Management) (suggesting that perhaps some
abbreviated version of depth rather than full depth of book could be
added to the consolidated market data); Roundtable Day Two
Transcript at 70 (Adam Nunes, Hudson River Trading) (cautioning
against trying to force every market's depth of book into a single
feed).
---------------------------------------------------------------------------
In addition, some commenters stated that depth of book data is
unnecessary for best execution and not useful for retail investors and
other market participants.\290\ In an article submitted to the comment
file for the Roundtable, one commenter expressed the view that depth of
book data is not helpful for many types of market participants, citing
a 2014 statistic that only 3.3% of all trades take place outside the
NBBO, where depth of book information would be particularly useful. The
commenter also noted that the Commission has stated that depth of book
data is not necessary for a broker to comply with its best execution
obligations.\291\
---------------------------------------------------------------------------
\290\ See Letter to Brent J. Fields, Secretary, Commission, from
Thomas Wittman, Executive Vice President, Head of Global Trading and
Market Services and CEO, Nasdaq Stock Exchange, 11 (Oct. 25, 2018)
(``Wittman Letter'') (``Main Street investors do not need the
exchanges' proprietary depth-of-book data offerings, and the fact
that some firms choose to purchase them has no adverse consequence
to the Main Street investor. Nearly 97% of trades occur at or within
the NBBO, reflecting that most customers do not require any sort of
depth-of-book data.''); NYSE Group Letter at 13 (``NYSE Group
believes that the Commission's prior conclusion that retail
investors do not need depth-of-book data has not changed.'').
\291\ See Letter to Brent J. Fields, Secretary, Commission, from
Charles M. Jones, Robert W. Lear Professor of Finance and Economics,
Columbia Business School, 15-16 (Oct. 21, 2018) (``Jones Letter'')
(citing Securities Exchange Act Release No. 59039, supra note 242).
---------------------------------------------------------------------------
(d) Commission Discussion and Proposal
Decimalization led to a dispersion of quoted volume away from the
top of book.\292\ Consequently, the top of book (or NBBO) currently
shown in SIP data has become less informative, and some market
participants have come to view depth of book data as essential both to
their efforts to trade competitively and to provide best execution to
customer orders.\293\ The Commission preliminarily believes that: (1)
The lack of depth of book information in SIP data creates a significant
information asymmetry between SIP data and proprietary data; and (2)
the availability of the additional information could help enhance the
best execution analyses of market participants who currently rely
solely on SIP data.
---------------------------------------------------------------------------
\292\ See supra Section III.C.2(b).
\293\ See supra notes 278, 280-286 and accompanying text.
---------------------------------------------------------------------------
Accordingly, the Commission preliminarily believes that core data,
as proposed, should include certain depth of book data, including
aggregated orders at each price between the best
[[Page 16753]]
bid and best offer and the protected bid and protected offer (if
different), as well as several price levels above and below the
protected bid and protected offer. The Commission believes that the
number of additional price levels should strike an appropriate balance
by significantly enhancing the utility of proposed core data for a wide
range of market participants, without risking the excessive message
traffic \294\ or complexity that might result from the inclusion of
full depth of book information in proposed core data. The Commission
preliminarily believes that this balance is appropriately struck at
five price levels (below and above the protected bid and protected
offer) as this would approximate the level of liquidity available to
market participants at the best bid or offer prior to
decimalization.\295\ The Commission is seeking comment on whether and
to what extent depth of book data should be included in the proposed
definition of core data.
---------------------------------------------------------------------------
\294\ As discussed below, aggregated quotation sizes at the
price levels between the best quotes and protected quotes and the
five levels above and below the protected quotes, particularly for
the most liquid stocks, represent only a subset of all depth of book
price levels at which there are quotations and could hence be
represented in fewer messages.
\295\ Prior to decimalization, when stocks were quoted in
sixteenths of a dollar ($0.0625), there were five one cent
increments between each permissible quoting increment. For example,
market participants could bid $20.0625 or bid $20.125 but not
$20.07, $20.08, $20.09, $20.10, $20.11. Decimalization permitted
quoting at these intermediate, one-cent price levels, spreading
quotation volume to these price levels. As a result of the
Commission's proposal to define depth of book data to include
aggregated quotation sizes at the five levels above and below the
protected quotations, the proposed core data would provide
transparency into the quotation interest that is comparable to the
information that was available at the top of the book prior to
decimalization.
---------------------------------------------------------------------------
Specifically, under proposed Rule 600(b)(25), ``depth of book
data'' would be defined as all quotation sizes at each national
securities exchange, aggregated at each price at which there is a bid
or offer \296\ that is lower than the best bid down to the protected
bid and higher than the best offer up to the protected offer; and all
quotation sizes at each national securities exchange, aggregated at
each of the next five prices at which there is a bid that is lower than
the protected bid and offer that is higher than the protected offer.
---------------------------------------------------------------------------
\296\ See supra Section III.C.1(d)(i) for a discussion of the
proposed definition of round lot and its effect on the terms bid and
offer. As discussed above, bids and offers would reflect the
proposed round lot sizes. See also Section III.C; supra note 128 and
accompanying text for a discussion of proposed odd-lot aggregation.
---------------------------------------------------------------------------
Although the Commission determined not to add depth of book data to
core data in adopting Regulation NMS,\297\ the Commission recognizes
that the market data needs of market participants continuously evolve.
Demand for more content-rich exchange proprietary feeds has increased
substantially in the years since the adoption of Regulation NMS,
indicating a growing need by market participants for additional data,
including depth of book data,\298\ in the increasingly fast,
electronic, and dispersed markets that have developed since 2005.\299\
The Commission preliminarily believes that enriching the content of the
data that is made available to investors and market participants by
including depth of book data, as defined, in the proposed core data
would promote fairer markets by reducing the information asymmetry
between market participants who subscribe to the exchanges' proprietary
depth products and those who rely on SIP data. In addition, the
Commission preliminarily believes that many market participants would
find depth of book data useful for trading in a more informed and
effective manner in today's markets.
---------------------------------------------------------------------------
\297\ See supra note 48.
\298\ See supra note 275, 277-278 and accompanying text.
\299\ See supra notes 241-244 and accompanying text; infra notes
310-313 and accompanying text (discussing how depth of book data is
used in order placement and other trading decisions).
---------------------------------------------------------------------------
As proposed, core data would include the best bids and offers and
the protected quotes of each exchange, which market participants need
to comply with legal and regulatory requirements, such as the duty of
best execution and Rule 611. The Commission preliminarily believes that
information on any trading interest between the best bids or offers and
the protected quotes, if they are different, would be of keen interest
to market participants. Therefore, the Commission is proposing to
include aggregated quotation sizes at each price where there is a bid
or offer in that range in the definition of depth of book data.
However, the Commission preliminarily believes that not all
individual quotations away from the best prices should be added to
proposed core data. While there may be some market participants that
need total visibility into exchange order books, the Commission does
not believe, at this time, that complete depth of book data should be
required to be made available as proposed core data. The addition of
complete, order-by-order depth of book data to proposed core data would
represent an enormous volume of information, which could increase
latencies in the provision of proposed core data and introduce
complexity that might impair the usability of such data for many
subscribers. The Commission's proposed definition of depth of book data
is intended to incorporate into core data additional quotation
information that would be useful to a broad array of market
participants for trading \300\ and to thereby further the goals of the
national market system.\301\ The Commission is not supplanting the
proprietary depth offerings of the exchanges that contain additional
content and that may be more appropriate for certain market
participants or more specialized use cases.
---------------------------------------------------------------------------
\300\ Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k-
1(c)(1)(B) (stating that the Commission shall prescribe rules to
``assure . . . the fairness and usefulness of the form and content
of'' information with respect to quotations for or transactions in
securities).
\301\ See, e.g., 15 U.S.C. 78k-1(a)(1)(C) (``The Congress finds
that . . . [i]t is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly
markets to assure--(i) economically efficient execution of
securities transactions; (ii) fair competition among brokers and
dealers, among exchange markets, and between exchange markets and
markets other than exchange markets; (iii) the availability to
brokers, dealers, and investors of information with respect to
quotations for and transactions in securities; (iv) the
practicability of brokers executing investors' orders in the best
market; and (v) an opportunity . . . for investors' orders to be
executed without the participation of a dealer.'').
---------------------------------------------------------------------------
The Commission recognizes that market participants have diverse
market data needs. The discussions at the Roundtable and the comments
received, however, suggest that many market participants need more than
the best bids, best offers, and the NBBO disseminated by the exclusive
SIPs in order to trade competitively and to optimize the placement of
customer orders.\302\ As noted above, the Commission's proposed
definition of depth of book data seeks to approximate the quotes that
market participants were able to access on the exclusive SIPs prior to
decimalization, which the Commission preliminarily believes would
significantly enhance the usefulness of proposed core data. The
Commission preliminarily believes that its proposed definition of depth
of book data strikes a balance between enhancing the usefulness of core
data for the many market participants that cannot rely entirely on SIP
data, and limiting the amount of data disseminated to limit complexity
and the processing demand on systems for market participants that do
not need full depth of book visibility.\303\ The
[[Page 16754]]
proposed definition of depth of book seeks to balance the needs of
different market participants, while reducing the information
asymmetries that exist today in the provision of SIP data and
proprietary data.
---------------------------------------------------------------------------
\302\ See supra text accompanying notes 280-286.
\303\ As discussed above, the inclusion of a limited number of
price levels in the proposed definition of depth of book data means
that fewer data messages would be required than would be the case if
full depth of book was proposed. See supra note 294. Accordingly,
the proposal would place lower processing demands on systems than if
full depth of book data were included in the definition of depth of
book data. Similarly, commenters have recommended the addition of
five levels of depth to core data, emphasizing the importance of
``balanc[ing] the need for more comprehensive information with the
additional cost and potential increase in latency from including
additional quotes.'' See supra note 283; SIFMA Letter II at 2. The
Commission is soliciting comment on the extent of depth of book data
that best strikes this balance, specifically by seeking quantitative
data from market participants regarding any complexity or processing
implications associated with the proposed definition of depth of
book data.
---------------------------------------------------------------------------
Staff believes that there is a substantial amount of quotation
volume several levels below the best bid and above the best offer. For
example, staff reviewed depth of book quotations for corporate stocks
using data from July 19, 2019. This analysis revealed that for this
day, indeed, there was substantial quotation volume several levels
below the best bid (the ask side was not examined). During active parts
of the trading day, there is quotation interest at every $0.01
increment at least ten levels out for the most liquid stocks; for the
least liquid stocks, there is a large gap between the best bid and the
next highest bid, and large gaps are generally also present between the
next several bid levels. This is consistent with the Commission's
proposal to define the depth of book price levels as the first five
levels ``at which there is a bid or offer,'' rather than alternatives
such as a fixed $0.05 band around the best quotes, since the former
would capture much of the depth of book quotation information for less
liquid stocks.\304\ In addition, the staff review found a significant
percentage of the total notional value of all depth of book quotations
for both liquid and illiquid stocks falls within the first five price
levels. The Commission preliminarily believes that requiring aggregated
quotation information at the first five price levels above and below
the protected quote range is a reasonable way to delineate the trading
interest that would be useful to a variety of market participants to
support more effective quoting and trading. On the other hand, while
quotations at price levels further away from the best bid and offer may
be relevant for market participants handling very large orders or
orders in highly illiquid securities for which liquidity at the top of
the book and the next five price levels is not sufficient to fully
execute the order, the Commission preliminarily believes that liquidity
at price levels further away is less likely to provide relevant or
immediately actionable information to many market participants.\305\
---------------------------------------------------------------------------
\304\ Moreover, because a ``bid or offer'' is defined in terms
of ``round lot,'' the proposed definition of round lot in effect
would establish a minimum size requirement for depth price levels so
that, for example, a small number of one share orders at an away
price for a stock whose prior calendar month's average closing price
on the primary listing exchange was under $50 would not count as one
of the price levels. The Commission acknowledges that the inclusion
of price levels ``at which there is a bid or offer'' in the proposed
definition of depth of book data could include quotations beyond
what would have been available at the top of the book prior to
decimalization for less liquid stocks, but believes that this
approach would approximate the level of liquidity available at the
top of the book prior to decimalization for more liquid stocks.
\305\ See SIFMA Letter II at 2 (stating that SIFMA members that
are retail firms generally use one level of depth for order routing,
while SIFMA members that are institutional firms generally use up to
five levels of depth, and sometimes as much as ten.).
---------------------------------------------------------------------------
While some market participants have stated that depth of book data
is necessary to fulfill their best execution obligations, other
commenters disagreed and pointed out that the Commission previously
stated that depth of book data is not necessary for best
execution.\306\ Several factors are considered in determining whether a
broker-dealer has ``use[d] reasonable diligence to ascertain the best
market'' \307\ for a customer order and fulfilled its best execution
obligations.\308\ The Commission is not stating that a broker-dealer
must always use all proposed depth of book data, under all
circumstances, to provide best execution to its customers. However, the
Commission preliminarily believes that the expanded set of proposed
core data, including the proposed depth of book data, provides
additional information that in many circumstances would be useful to a
broker-dealer's best execution analysis.\309\
---------------------------------------------------------------------------
\306\ See supra notes 284-291 and accompanying text.
\307\ FINRA Rule 5310.
\308\ See Kurz v. Fidelity Management & Research Co., 556 F.3d
639, 640 (7th Cir. 2009) (describing the ``duty of best execution''
as ``getting the optimal combination of price, speed, and liquidity
for a securities trade''); Geman v. SEC, 334 F.3d 1183, 1186 (10th
Cir. 2003) (noting that ``the duty of best execution requires that a
broker-dealer seek to obtain for its customer orders the most
favorable terms reasonably available under the circumstances''
(quoting Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135
F.3d 266, 270 (3d Cir. 1998))).
\309\ See Order Execution Obligations Release, supra note 245.
---------------------------------------------------------------------------
Where liquidity is distributed over multiple price points and less
liquidity is available at the top of book,\310\ depth of book data is
of increased importance to market participants for a number of reasons.
Depth of book data can assist SORs and electronic trading systems with
the optimal placement of orders across markets. For example, the
Commission preliminarily believes that the proposed depth of book data
would better inform traders on how to optimally place liquidity taking
orders (i.e., marketable orders that execute against the liquidity of
resting limit orders) that are larger than the displayed best bid or
best offer.\311\ In addition, the Commission preliminarily believes
that proposed depth of book data would assist market participants in
determining how best to use liquidity providing orders (i.e., non-
marketable orders that will be posted on an exchange's order book
without immediately executing) at prices away from the best bid or
offer by providing insight into the length of order book queues.\312\
Finally, the Commission preliminarily believes that the proposed depth
of book data would provide market participants with directional signals
to help inform them about near-term market movements based upon
aggregate market imbalance information.\313\
---------------------------------------------------------------------------
\310\ See supra notes 276-277.
\311\ For example, if a liquidity taking order is larger than
the displayed liquidity at the top of book and seeks to access
liquidity at additional price level(s), then information about
liquidity at other price levels is valuable in determining where to
send an oversized order when trading in a market ecosystem with
multiple exchanges. See, e.g., Shmuel Baruch, Who Benefits from an
Open Limit-Order Book?, Journal of Business, Vol. 78, No. 4, 1267-
1306 (July 2005), available at https://www.jstor.org/stable/10.1086/430860 (presenting some theoretical results showing that liquidity
takers benefit more from an open limit order book).
\312\ For example, if a market participant using a particular
trading strategy wishes to post orders passively at multiple price
levels, depth of book information is valuable in determining the
order book queue length (and therefore the ability to achieve
beneficial queue priority) at different market centers. Further,
depth of book data can assist market participants' trading
strategies achieve better queue placement across market centers. See
Roundtable Day One Transcript at 169 (Adam Inzirillo, BAML) (``So
depth of book is important to understand where you are potentially
in the queue when you aggregate yourself across the overall market
center.''); Exegy, Checklist for Ensuring Best Execution with
Historical Trade Performance Analysis (Dec. 6, 2018), available at
https://www.exegy.com/2018/12/checklist-best-execution-trade-performance-analysis/ (``Liquidity can be valuable for executing
large volume orders because the orders can be executed with minimal
impact to market price. However, very high liquidity can also cause
price volatility at a given exchange or time interval that produces
slippage. Queue position and message volume are two valuable
indicators of this liquidity. A long depth of book or high message
volume may signal to traders to re-route an order to a different
exchange. However, without a planned strategy for routing an order,
slipping may arise.'').
\313\ See, e.g., [Aacute]lvaro Cartea, et al., Enhancing Trading
Strategies with Order Book Signals (Oct. 1, 2015), available at
http://www.smallake.kr/wp-content/uploads/2015/11/SSRN-id2668277.pdf
(``[O]ur measure of [volume] imbalance [in the limit order book]
acts as a strong predictor of the rate of incoming [market orders]
as well as the direction and magnitude of price movements following
a [market order].''); Charles Cao, et al., The Information Content
of an Open Limit-Order Book, Journal of Futures Markets Vol. 29, No.
1, 16-41 (2009), available at http://www.pbcsf.tsinghua.edu.cn/research/caoquanwei/paper/10.The%20Information%20Content%20of%20an%20Open%20Limit%20Order%20Book.pdf (``[T]he authors find that the order book beyond the first
step is modestly informative and that price discovery measures
suggest that the contribution of the order book beyond the best bid
and offer is approximately 22%''); Ke Xu, Martin D. Gould, and Sam
D. Howison, Multi-Level Order-Flow Imbalance in a Limit Order Book,
Mathematical Institute, University of Oxford (Oct. 29, 2019) (``[W]e
find that including net order flow deeper into the limit order book
improves the goodness-of-fit of the multi-level order-flow imbalance
regressions for all of the stocks in our sample, with an improvement
of about 65-75% for large-tick stocks and about 15-30% for small-
tick stocks. We argue that in many practical applications,
improvements of this magnitude are economically meaningful.'').
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[[Page 16755]]
Several Roundtable panelists and commenters raised potential
concerns regarding the addition of depth of book data.\314\ The
Commission preliminarily believes its proposed definition of depth of
book data, and its proposal to introduce a definition of core data and
a decentralized consolidation model for the dissemination of proposed
consolidated market data more broadly, are responsive to these
concerns. With respect to the view that depth of book data could be
confusing or not of interest to all investors, the Commission is not
mandating the consumption of five levels of depth data by all market
data subscribers. While, as discussed below, competing consolidators
must calculate and generate consolidated market data, as proposed,
including depth of book data, and offer it to subscribers, competing
consolidators would not be prohibited from developing and providing top
of book only or customized depth of book products to customers who
desire such products.\315\ The effective national market system plan(s)
could offer a variety of proposed consolidated market data products
geared toward particular categories of end-users, and certain
exchanges, recently, have suggested possible approaches for doing
so.\316\ With respect to the view that including depth of book data
could present technical challenges and have latency ramifications, the
Commission preliminarily believes the proposal to add five levels of
aggregated depth from each exchange, rather than all order-by-order
depth, is responsive to these concerns.\317\ Restricting depth of book
data to the aggregate depth at each price level would limit the number
of messages included within proposed core data, making the
technological changes required more manageable and mitigating latency
concerns. Indeed, the Commission's proposed approach aligns with some
of these commenters' suggestions that simpler and more abbreviated
versions of depth of book data might be more workable.\318\
---------------------------------------------------------------------------
\314\ See supra notes 287-289 and accompanying text.
\315\ See supra Section III.A (explaining that different market
participants and different trading applications have different needs
for NMS information, that the proposal to expand and modernize the
content of NMS information is intended to address the needs of a
broad cross-section of market participants, and that the Commission
is not specifying minimum data elements needed to achieve best
execution).
\316\ See, e.g., NYSE Equities Insights, Stock Quotes and Trade
Data: One Size Doesn't Fit All (Aug. 22, 2019), available at https://www.nyse.com/equities-insights (proposing enhancing the exclusive
SIPs by offering depth of book, odd-lot quotes, and primary auction
imbalance information in three new tiers of service, each of which
would have different levels of data content); infra Section IV.B.4.
\317\ Today, there are a number of private data vendors that
have developed software and infrastructure solutions for
consolidating several of the most voluminous depth of book data
feeds across equity markets and are providing consolidated depth of
book products, which suggest that technical challenges and latency
concerns can be addressed.
\318\ See supra note 289 and accompanying text.
---------------------------------------------------------------------------
In addition, some commenters cited statistics on the high
proportion (97%) of trades that execute at or within the NBBO in
support of their views that depth of book data is not necessary for
retail investors or other market participants.\319\ The Commission
preliminarily believes that, even if these figures are accurate for the
current market, they do not, on their own, persuade the Commission that
it should not propose to add depth of book data to core data. The
commenters, for example, do not specify whether or not the broker-
dealers handling the orders at issue had access to proprietary DOB
products for their automated trading systems; if they did, depth of
book data may have been contributing to the observed high at-or-within-
the-NBBO execution rates. For example, as discussed above, depth of
book data can indicate the direction a stock price may be moving, which
some market participants factor into the prices at which they place
limit orders.\320\ Furthermore, in response to the comments that retail
investors do not need depth of book data, the Commission preliminarily
believes that there are different types of retail investors that have
different market data needs and preferences. Some retail investors may
not need depth of book information but other, more sophisticated retail
investors may find depth of book data useful, as one Roundtable
panelist from a retail firm stated.\321\ Further, while competing
consolidators would have to offer proposed consolidated market data to
end-users, they also would be permitted to develop products for their
customers that could be customized to their customers' needs.\322\
Therefore, a competing consolidator could develop a consolidated market
data product that does not contain proposed depth of book data if there
is demand.\323\ The Commission's proposal aims to provide broker-
dealers and other market participants with improved access to
meaningful depth of book information, so it can be used to improve
order placement or other trading decisions and thereby potentially
improve execution quality for investors.
---------------------------------------------------------------------------
\319\ See supra notes 290-291 and accompanying text.
\320\ Similarly, depth of book data can provide insight into the
length of order book queues on different exchanges and therefore the
prices at which limit orders can attain queue priority, helping
market participants pursue trading strategies involving the
placement of liquidity-providing orders that will not execute until
the NBBO changes. See supra note 312 and accompanying text.
\321\ See supra note 281 and accompanying text. In addition,
another Roundtable panelist whose firm handles the orders of retail
customers indicated that his firm needs depth of book data to
fulfill its obligations to its retail customers. See supra note 285.
\322\ See infra Section IV.B.1.
\323\ Competing consolidators would be required to calculate and
generate consolidated market data, including depth of book data as
set forth in the Commission's proposed definition, and to offer such
data to subscribers. See proposed Rule 614(d)(1)-(3). As explained
above, the Commission believes that the proposed depth of book data
would support the needs of some market participants. See supra notes
301-305. However, some market participants may not need the depth of
book data specified in the proposed definition. As proposed, market
participants would be able to choose the components of consolidated
market data that meet their needs, consistent with regulatory
requirements, and purchase such data from competing consolidators.
---------------------------------------------------------------------------
Finally, the proposed definition of core data specifies that odd-
lot quotations at the relevant price levels between the national best
bid or offer and the protected quotation, and at the five price levels
above and below the protected quotation that can be aggregated into at
least a round lot, would be included in depth of book data. As
discussed above, the Commission preliminarily believes that its
proposed definition of round lot reflects trading interest of
meaningful size to market participants. The Commission further
preliminarily believes that trading interest that is of less than
meaningful size (i.e., an odd-lot size), that together with other odd-
[[Page 16756]]
lots aggregates into a round lot, similarly represents trading interest
of meaningful size and should be displayed at the most conservative
price at which such trading interest could be accessed.\324\
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\324\ See supra notes 129-130, 157 and accompanying text. To the
extent that an SRO provides proprietary data products for the
purposes of making consolidated market data available to competing
consolidators and self-aggregators, any odd-lot quotations that are
aggregated in an SRO's existing proprietary data products would be
required to be aggregated in a manner consistent with the method set
forth in the proposed definition of core data. See proposed Rule
600(b)(20).
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The Commission requests comment on the proposed inclusion of depth
of book data in the proposed definition of core data and the definition
of depth of book data in proposed Rule 600(b)(25). In particular the
Commission solicits comment on the following:
38. Should depth of book data be included in the proposed
definition of core data? Why or why not? Do commenters believe the
proposed definition of depth of book data would have any negative or
unintended consequences? Why or why not?
39. Do commenters believe that the Commission's proposed definition
of depth of book data captures the appropriate level of depth data that
should be included in the proposed definition of core data? Why or why
not? Should the Commission include more or fewer levels of depth or
otherwise revise the definition to capture the key depth information
that would be useful to market participants? For example, should the
Commission require depth only within a $0.05 band of the protected bid
and offer rather than the first five price levels at which there is
interest?
40. Does the proposed definition of depth of book data adequately
balance the need for more information against potential increases in
complexity and processing demand that might result from the addition of
such depth of book data? If not, where is this balance most
appropriately struck in terms of the extent of depth of book data that
should be included in the proposed definition of core data?
Particularly, what processing demands would be associated with
including varying levels of depth of book data? Please consider the
proposed five levels of depth of book as well as any other possible
depth of book alternatives. Please provide quantitative data and
analyses to support your comments.
41. Do commenters believe that the ``at which there is a bid or
offer'' language in the Commission's proposed definition of depth of
book data establishes an appropriate minimum size threshold (i.e., the
existence of at least a round lot of aggregated interest) for inclusion
as one of the five price levels? Why or why not? Are there alternative
ways to set such a threshold, such as price levels where the volume of
interest equals a certain percentage of the volume at the best price?
42. Do commenters believe that odd-lot quotes at the depth price
levels that aggregate into at least a round lot should be included in
the proposed definition of core data? Why or why not?
43. The proposed definition of depth of book data refers to depth
of book quotations on each national securities exchange, as FINRA's
Alternative Display Facility (``ADF'') currently does not have
quotations submitted to it. Should the proposed definition be
formulated to include the depth of book quotations of national
securities associations as well to account for the possibility of OTC
quotes being reported to the ADF in the future? Why or why not?
3. Auction Information
Even as the proportion of trades executing in auctions has risen,
little auction information is currently included in today's SIP
data.\325\ The Commission is proposing to include auction information,
including auction order imbalance and other auction data generated by
the exchanges during an auction, in the proposed definition of core
data.\326\ The Commission preliminarily believes that including auction
information, as described below, in the proposed definition of core
data would promote the goals of the national market system \327\ by
conveying important information about orders participating in auctions
and helping market participants to participate in auctions in a more
informed and effective manner.
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\325\ See infra notes 333-334 and accompanying text.
\326\ See proposed Rule 600(b)(5). The definition of auction
information in proposed Rule 600(b)(5) is ``all information
specified by national securities exchange rules or effective
national market system plans that is generated by a national
securities exchange leading up to and during an auction, including
opening, reopening, and closing auctions, and disseminated during
the time periods and at the time intervals provided in such rules
and plans.'' Accordingly, the proposed definition would include
auction information that may be developed in the future and added to
an SRO's rules that are approved by the Commission pursuant to Rule
19b-4, 17 CFR 240-19b-4.
\327\ See, e.g., 15 U.S.C. 78k-1(a)(1)(C) (``The Congress finds
that . . . [i]t is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly
markets to assure . . . the availability to brokers, dealers, and
investors of information with respect to quotations for and
transactions in securities . . . [and] the practicability of brokers
executing investors' orders in the best market.'').
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(a) Background
Auctions are held pursuant to exchange rules at specified periods
during the trading day (i.e., at the open, at the close, or during the
day to reopen a stock that has been halted) when continuous trading is
not occurring. During an auction, buy and sell orders generally
interact at the single price, within limits, that maximizes the trading
volume that can be executed. For example, a closing auction generally
is held at the end of regular trading hours on the primary listing
exchange pursuant to a process set forth in the primary listing
exchange's rules to determine a security's official closing price.
Typically, market-on-close orders, limit-on-close orders, and orders
resting on the primary listing exchange's order book at the time a
closing auction begins may participate in a closing auction. However,
the rules of a primary listing exchange may also allow other specified
order types, such as closing offset orders and D-orders on NYSE or
imbalance-only close orders on Nasdaq, to participate in a closing
auction.\328\ The opening auctions, which generally are held at the
start of regular trading hours, also use specialized order types as
specified in the rules of the primary listing market.\329\
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\328\ See, e.g., NYSE Rule 7.31(d)(4) (A Discretionary Order, or
``D Order,'' is a ``Limit Order that may trade at an undisplayed
discretionary price''); NYSE Rule 13(c)(1) (A Closing Offset, or
``CO,'' Order is ``[a] day Limit Order to buy or sell as part of the
closing transaction where the eligibility to participate in the
closing transaction is contingent upon: (i) An imbalance in the
security on the opposite side of the market from the CO Order; (ii)
after taking into account all other types of interest eligible for
executing at the closing price, there is still an imbalance in the
security on the opposite side of the market from the CO Order; and
(iii) the limit price of the CO Order being at or within the price
of the closing transaction.''); NYSE Rule 123C; Nasdaq Rule
4702(b)(13)(A) (``An `Imbalance Only Order' or `IO Order' is an
Order entered with a price that may be executed only in the Nasdaq
Closing Cross and only against [market-on-close] Orders or [limit-
on-close] Orders.'').
\329\ See, e.g., NYSE Open and Closing Auctions, available at
https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Opening_and_Closing_Auctions_Fact_Sheet.pdf (last accessed Nov.
25, 2019); Nasdaq Opening and Closing Crosses, available at http://www.nasdaqtrader.com/Trader.aspx?id=OpenClose (last accessed Nov.
25, 2019).
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Auctions conducted by the exchanges, especially opening and closing
auctions, have become increasingly important liquidity events in recent
years and represent a significant proportion of overall trading
volume.\330\ One factor
[[Page 16757]]
that may be driving the higher concentration of trading in closing
auctions is the growth of passive, index-tracking investment strategies
through mutual funds, ETFs, and similar products.\331\ Since passive
strategies and ETFs often track the performance of a benchmark index,
and the closing price used in the benchmark index calculation is often
set during the closing auction, participation in closing auctions has
become increasingly important.\332\
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\330\ See, e.g., Rosenblatt Securities, Closing Time: How End-
of-Day Auctions are Taking Over U.S. Equity Trading (Jan. 17, 2019)
(stating that the percentage of consolidated volume in the executed
at the close increased from 4.6% in 2013 to 8.4% in 2018); Financial
Times, The 30 Minutes that Have an Outsized Role in US Stock Trading
(Apr. 24, 2018), available at https://www.ft.com/content/9e1f05b4-43e7-11e8-803a-295c97e6fd0b (``The first and last half-hour of the
U.S. trading day now accounts for 39.6 per cent of all volumes, up
from 31.5 per cent a decade ago, according to Credit Suisse data. A
decade ago about 16 per cent of all trading happened in the final 30
minutes, but that rose to more than 20 per cent in 2012, and almost
25 per cent this year. The closing auction alone--when most ETFs do
their rebalancing--now accounts for 8.2 per cent of volumes in 2018,
up from 3 per cent in 2007''); Greenwich Associates, Stock Trading
Volumes Gravitate to Open and Closing Auctions (Feb. 2, 2017),
https://www.greenwich.com/press-release/stock-trading-volumes-gravitate-open-and-closing-auctions (stating that ``[o]n average
across both NYSE and Nasdaq listed securities, closing auctions now
represent 5.5% of average daily volume, up from just 3.6% in 2011.
Over the same period, average open auction volume increased from
1.1% to 1.25%'').
\331\ See, e.g., Securities Exchange Act Release No. 75165 (June
12, 2015); 80 FR 34729, 34729-30 (June 17, 2015) (``[F]rom 2006 to
2013, the total number of ETPs [exchange-traded products] listed and
traded as of year-end rose by an average of 160 per year, with a net
increase of more than 200 in both 2007 and 2011. . . The total
market capitalization of ETPs has also grown substantially, nearly
doubling since the end of 2009. Much of this growth has been in
index-based ETPs. As of December 31, 2014, there were 1,664 U.S.-
listed ETPs, and they had an aggregate market capitalization of just
over $2 trillion. Trading in these ETPs makes up a significant
portion of secondary-market equities trading. For example, during
2014, trading in U.S.-listed ETPs made up about 16.7% of U.S. equity
trading by share volume and 25.7% of U.S. equity trading by dollar
volume.'').
\332\ See Greenwich Associates, Webinar: Trading the Auctions
(Apr. 5, 2017), available at https://business.nasdaq.com/media/Trading-the-Auctions-Webinar-April-2017-17_tcm5044-46070.pdf (``As
passive strategies and ETFs aim to track the performance of a
benchmark index, they rely heavily on the closing auction, as it
determines the closing price used in the benchmark index price
calculation. Growth in passive investing and ETFs will thereby make
the auction process ever more important.''); see also, e.g., Nasdaq
Rule 4754 (``The Nasdaq Closing Cross price will be the Nasdaq
Official Closing Price for stocks that participate in the Nasdaq
Closing Cross.'').
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To participate efficiently in auctions conducted by the exchanges,
market participants seek information about orders that are
participating in the auctions. This includes information about auction
order imbalances, which reflect the extent to which auction buy orders
exceed auction sell orders (or vice-versa) and are generally provided
at periodic intervals leading up to the auction. In addition, primary
listing exchanges provide information about the indicative price for
the auction based on auction orders received at that time.
Today, only limited auction-related information is included in SIP
data.\333\ Some NYSE auction data is disseminated through the CTA/CQ
SIP,\334\ but this reflects only a small subset of the auction-related
information that the primary listing exchanges generate. No auction
information generated by the other primary listing exchanges, including
Nasdaq, NYSE Arca, and Cboe BZX, is distributed through the exclusive
SIPs.
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\333\ The LULD Plan requires the primary listing exchanges to
provide the exclusive SIPs with certain auction information for
dissemination related to reopening auctions after LULD trading
pauses: Auction reference price, auction collars, and number of
extensions to the reopening auction. See LULD Plan, supra note 38,
at VII.B.1. The reopening auction data in proprietary products
contains this data plus additional data. For example, NYSE's
Integrated feed includes, among other data elements, a paired
quantity (number of shares paired at the reference price), total
imbalance quantity (number of shares not matched at the reference
price), and the side of any imbalance (buy or sell). See NYSE XDP
Integrated Feed Client Specification (Jan. 29, 2018). Nasdaq's Total
View feed includes similar information for auctions that occur after
halts or pauses. See Nasdaq TotalView-ITCH 5.0 Specifications.
\334\ For example, in 1998, the Commission approved a NYSE
proposal to allow the exchange to disseminate via the CTA/CQ SIP
market-on-close (``MOC'') and limit-on-close (``LOC'') imbalance
information in the final minutes of each trading day. See Securities
Exchange Act Release No. 40094 (June 15, 1998), 63 FR 33975 (June
22, 1998). The proposal provided for mandatory dissemination of all
MOC and LOC imbalances of 50,000 shares or more at 3:40 p.m.
Dissemination of imbalances of less than 50,000 shares could be made
at the discretion of a floor official. The Commission stated its
belief that the dissemination of such additional information through
the plan processor would ``increase the amount of accurate market
information available to the public'' and may ``increase public
awareness of MOC/LOC order imbalances,'' potentially resulting in
less market volatility. See id. at 33977-78; NYSE Rule 123C
(providing that information regarding any disparity between MOC and
marketable LOC interest to buy and MOC and marketable LOC interest
to sell, measured at 3:50 p.m., of 50,000 shares or more shall be
published on the consolidated tape; publication of imbalances in
amounts less than 50,000 shares may also be published with the prior
approval of a Floor Official or other qualified ICE employee). In
addition, pre-opening indications, including the security and the
price range within which the opening price is anticipated to occur,
are published via the plan processors under certain conditions. See
NYSE Rule 15.
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By contrast, the primary listing exchanges provide a wide range of
auction-related information through their proprietary data
products.\335\ For example, NYSE provides opening auction information,
such as opening order imbalance information and indicative pricing
information, only through its proprietary market data products.\336\ In
addition, with respect to closing auctions, NYSE disseminates order
imbalance information approximately every five seconds between 3:50
p.m. and 4:00 p.m., which consists of real-time imbalances between
marketable closing orders to buy and marketable closing orders to sell,
along with the indicative price at which the auction would occur at
that time. This information is available only through NYSE's
proprietary market data products.\337\ Similarly, Nasdaq,\338\
[[Page 16758]]
NYSE Arca,\339\ and Cboe BZX \340\ provide auction information that is
available only through each exchange's proprietary market data
products.
---------------------------------------------------------------------------
\335\ The auction-related information disseminated through
exchange proprietary feeds includes: The ``reference'' or
``indicative match'' prices at which the largest potential auction
would occur, imbalance side (buy or sell), number of shares of buy
and sell orders at the indicative match price and reference price,
paired quantity (number of shares matched at the indicative match
price and reference price), execution quantity (number of shares
executed at the indicative match price and reference price),
imbalance quantity (number of shares not matched at the indicative
match price and reference price), market order imbalance quantity
(number of shares of market orders not matched at the indicative
match price and reference price), far price (hypothetical auction-
clearing price for cross orders only), near price (hypothetical
auction-clearing price for cross orders and continuous orders),
price variation indicator (absolute value of the percent of
deviation of the near price to the nearest current reference price),
continuous book clearing price, closing only clearing price, upper
collar, lower collar, freeze status, and number of times halt period
extended. See, e.g., Nasdaq Rule 4754; Nasdaq TotalView-ITCH 5.0
Specifications; NYSE Rule 15; NYSE XDP Integrated Feed Client
Specification.
\336\ See NYSE Rule 15.
\337\ See NYSE Rule 123C (describing the dissemination of
information regarding imbalances that accumulate prior to the
closing transaction, including information on disparities between
MOC and marketable LOC interest to buy and MOC and marketable LOC
interest to sell, a data field indicating the price at which
closing-only interest (e.g., MOC, LOC, and other auction-only
orders) may be executed in full, and, beginning at 3:55 p.m.,
certain floor-broker quotes containing pegging instructions eligible
to participate in the closing transaction).
\338\ During the five minutes prior to the Nasdaq closing
auction (also referred to as the closing cross) at 4:00 p.m., Nasdaq
disseminates an ``Order Imbalance Indicator'' every second. The
Nasdaq closing cross is an auction process in which Nasdaq's closing
book and continuous book are brought together to create a single
closing price. See Nasdaq Opening and Closing Crosses FAQs,
available at https://www.nasdaqtrader.com/content/ProductsServices/Trading/Crosses/openclose_faqs.pdf (last accessed Jan. 7, 2020).)
The Order Imbalance Indicator includes a reference price at which
the maximum number of shares can be matched, the number of shares
that can be matched at the reference price, the number of shares
that cannot be matched at the reference price (i.e., the imbalance),
the buy/sell direction of any imbalance, and a variety of indicative
prices such as the ``far price,'' a hypothetical auction-clearing
price for cross orders, and ``near price,'' a hypothetical auction-
clearing price for cross orders as well as continuous orders. See
Nasdaq Rule 4754; Nasdaq TotalView-ITCH 5.0 Specifications.
\339\ NYSE Arca disseminates ``Auction Imbalance Information''
via proprietary data feeds, specifically the NYSE Arca Order
Imbalance feed and NYSE Arca Integrated feed. See NYSE Arca Rule
7.35-E(a)(4)(C); NYSE Arca Trading Information: Auctions Overview,
available at https://www.nyse.com/markets/nyse-arca/trading-info
(last accessed Jan. 7, 2020). Auction Imbalance Information includes
``if applicable, the Total Imbalance, Market Imbalance, Indicative
Match Price, Matched Volume, Auction Reference Price, Auction
Collar, Book Clearing Price, Far Clearing Price, Imbalance Freeze
Indicator, and Auction Indicator.'' NYSE Arca Rule 7.35-E(a)(4).
\340\ Cboe BZX disseminates, via the Bats Auction Feed, Closing
Match Process Information (the total size of all buy and sell orders
matched at the close) for Non-BZX-Listed Securities and
``information regarding the current status of price and size
information related to auctions conducted by the Exchange.'' See
Cboe BZX Rules 11.22(i), 11.28(c).
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As noted above, proprietary feeds also include additional
information in connection with reopening auctions after trading halts
that goes beyond the LULD information that primary listing exchanges
are required to report to the exclusive SIP.\341\
---------------------------------------------------------------------------
\341\ See supra note 333.
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(b) Comments and Roundtable Discussion
In connection with the Roundtable, several panelists and commenters
supported the addition of auction information to SIP data.\342\ For
example, one commenter stated that the Commission should require the
inclusion of auction order imbalance information in SIP data and
expressed the view that doing so should not materially increase the
operating costs of the exclusive SIP.\343\
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\342\ See Roundtable Day One Transcript at 98 (Stacey
Cunningham, NYSE); Roundtable Day One Transcript at 98 (Chris
Concannon, CBOE); Roundtable Day One Transcript at 116 (Michael
Blaugrund, NYSE); Roundtable Day Two Transcript at 124 (John Ramsay,
IEX); Roundtable Day Two Transcript at 245-46 (Tyler Gellasch,
Healthy Markets); NYSE Group Letter at 6, 13 (stating ``information
about auction imbalances is now automated and yet is available only
via proprietary data feeds'' and ``NYSE Group believes that Main
Street could also benefit if auction imbalance information were
included in the core data disseminated by the SIPs'' and
recommending the expansion of the definition of core data to include
auction imbalance information).
\343\ See SIFMA Letter II at 2 (``At minimum, auction imbalance
information shall include matched quantity, imbalance size, near
price, far price, paired shares and imbalance shares.'').
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Similarly, other panelists and commenters emphasized the importance
of auction information, including for achieving best execution.\344\
One panelist indicated that auctions are becoming more important and
that institutional investors use auction imbalance data to trade.\345\
Another panelist stated that auction imbalance information is important
for retail investors, particularly high-net worth individuals, because
the amount of the imbalance may be significant to a trading
decision.\346\
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\344\ See Roundtable Day One Transcript at 228-29 (Joseph Wald,
Clearpool Group) (stating that the lack of auction information (and
depth of book data) on the exclusive SIPs needs to be addressed);
Clearpool Letter (``We believe that certain information currently
provided through proprietary data feeds, for example, imbalance data
and order depth of book information, should be considered core data
and provided to all market participants through the SIP.''); MFA and
AIMA Letter at 6 (stating that that its members purchase proprietary
market data (e.g., depth of book and imbalance data) from exchanges
for a variety of reasons, including strategy implementation, risk-
analysis, best execution, less latency than other sources, and to
fulfill fiduciary obligations).
\345\ See Roundtable Day Two Transcript at 68 (Paul O'Donnell,
Morgan Stanley).
\346\ See Roundtable Day One Transcript at 159-60 (Adam
Inzirillo, BAML).
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However, one panelist (Nasdaq) opposed adding auction information
to the exclusive SIP. The panelist indicated that Nasdaq views its
crossing process as its intellectual property, retail investors do not
use the imbalance information, and auction data is already widely
available to retail investors and retail online brokers.\347\
---------------------------------------------------------------------------
\347\ See Roundtable Day One Transcript at 157-59 (Oliver
Albers, Nasdaq).
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(c) Commission Discussion and Proposal
Auctions have become an increasingly significant part of the
trading day, accounting for approximately 7% of daily equity trading
volume.\348\ Auctions, especially the opening and the closing auctions,
are important for the implementation of passive investment strategies,
as detailed above, and generate prices that are used for a variety of
market purposes, including setting benchmark prices for index
rebalances and for mutual fund pricing. Reopening auctions also play a
crucial role in connection with security-specific or market-wide
events, helping to assure the resumption of orderly trading following a
limit up-limit down or other regulatory halt.\349\ Auction information,
including auction order imbalance and other auction data, is important
for effective participation in these significant market events.
---------------------------------------------------------------------------
\348\ This figure is based on data available on Cboe's website
from November of 2019. See Cboe: U.S. Equities Market Volume
Summary, available at https://markets.cboe.com/us/equities/market_share/ (last accessed Nov. 26, 2019); Rosenblatt Securities,
supra note 330 (stating that closing auction volume amounted to 8.4%
of consolidated volume); Greenwich Associates, Stock Trading Volumes
Gravitate to Open and Closing Auctions (Feb. 2, 2017), available at
https://www.greenwich.com/press-release/stock-trading-volumes-gravitate-open-and-closing-auctions (stating that average opening
auction volume in 2017 was 1.25% of average daily volume).
\349\ For example, on Aug. 24, 2015, LULD halts were triggered
in 471 securities. More than half (55%) of the impacted securities
triggered more than one halt, and over one quarter (26%) of the
impacted securities were halted 4 or more times. See Staff of the
Office of Analytics and Research, Division of Trading and Markets,
Equity Market Volatility on Aug. 24, 2015, at 68 (Dec. 2015).
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However, the content of SIP data has not been updated to reflect
the growing importance of auctions, and today most auction-related
information is available only through exchange proprietary data
products.\350\ This exacerbates the information asymmetries between SIP
data and proprietary data \351\ and has raised concerns among market
participants as to whether SIP data is sufficient to provide best
execution to customer orders during auctions.\352\ Moreover, lack of
full reopening auction information in SIP data may inhibit widespread
participation in reopening auctions following limit-up-limit-down halts
or other volatility events and may impede efficient price discovery
during these critical periods.\353\
---------------------------------------------------------------------------
\350\ See supra notes 333-341.
\351\ See infra note 358 and accompanying text (explaining that
auction data that would support more informed participation in
auctions is not available publicly or to retail investors).
\352\ See supra note 344.
\353\ See supra note 333 (comparing the LULD information
available through the exclusive SIP feeds with the more extensive
reopening auction information available through proprietary market
data products).
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As discussed above, market participants rely upon auction
information for effective participation in opening, closing, and
reopening auctions.\354\ Accordingly, the Commission preliminarily
believes that full auction-related information should be included in
the proposed definition of core data. Specifically, under proposed Rule
600(b)(5) of Regulation NMS, ``auction information'' would be defined
as all information specified by national securities exchange rules or
[[Page 16759]]
effective national market system plans that is generated by a national
securities exchange leading up to and during an auction, including
opening, reopening, and closing auctions, and disseminated during the
time periods and at the time intervals provided in such rules and
plans.
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\354\ Market participants use auction information in making a
variety of trading decisions. See Markets Media, Auction Imbalance
Data Affects Traders (Feb. 7, 2017), available at https://www.marketsmedia.com/auction-imbalance-data-affects-traders (stating
that ``70% of traders said real-time imbalance data can influence
how their firm trades in the auction or continuous market'' and
explaining that large orders can be executed in auctions with less
price impact). For example, market participants use auction
imbalance information to predict closing volume, which is ``an
important factor in the optimal scheduling of algorithmic trading.''
See Global Trading, Closing Volume Discovery (Sept. 23, 2019),
available at https://www.fixglobal.com/home/closing-volume-discovery/. Since actual daily closing volume can vary widely, it is
difficult for market participants to manage order placement logic
for orders that are being submitted to auctions. Id. Auction
imbalance messages published by the primary listing exchanges
through proprietary market data products help market participants
more accurately predict closing volume. Id.
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The elements of proposed auction information would be established
by individual exchange rules or effective national market system plans
(e.g., the LULD Plan). The individual exchanges have established their
own auction information elements that are relevant to their individual
auction processes, and effective national market system plans have also
established information requirements related to certain auctions (e.g.,
reopenings after LULD trading pauses).\355\ The Commission
preliminarily believes that each individual exchange and relevant plan
should be able to design and develop its individual auctions and the
data elements that would be useful to market participants that
participate in such auctions. Further, by tying the proposed definition
to the rules of the exchanges and effective national market system
plans, the proposed definition could evolve over time as such exchanges
or plans develop new data elements in the future. Any additional data
element set forth in an exchange's rules or plan(s) would be subject to
Commission consideration pursuant to Section 19(b) of the Exchange Act
and Rule 19b-4 or Rule 608, respectively.
---------------------------------------------------------------------------
\355\ See, e.g., LULD Plan, supra note 38, Section VII(B)(1).
---------------------------------------------------------------------------
The Commission preliminarily believes that the proposed definition
of auction information would promote more informed and effective
trading in auctions. For example, information regarding the size and
side of order imbalances can indicate the direction a stock's price
might move and inform decisions on where to price an auction order and
what order type to use. Including auction information in core data, as
proposed, would facilitate a broader distribution of this information
to a greater number and variety of market participants. The Commission
preliminarily believes that this would help to promote more informed
trading for a greater number of market participants, which could also
facilitate price formation, and improve execution quality for more
traders and investors. While some market participants may not need the
proposed auction information, based on the growth of auctions and the
importance a variety of market participants have ascribed to
information about orders participating in auctions, the Commission
preliminarily believes that many market participants, including some
retail investors, would use this information to participate in auctions
in a more informed and effective manner.\356\
---------------------------------------------------------------------------
\356\ See supra notes 342-346 and accompanying text. Moreover,
as noted above, see supra note 323, competing consolidators will be
required to calculate and generate consolidated market data,
including the auction information set forth in the Commission's
proposed definition, and to offer this information to subscribers.
See proposed Rule 614(d)(1)-(3). However, market participants may
require more or less auction information than specified in the
proposed definition, and can choose auction information products
offered by competing consolidators that are more tailored to their
specific needs.
---------------------------------------------------------------------------
Some Roundtable panelists objected to the inclusion of auction
information in core data. For example, as previously noted, Nasdaq
asserted that its crossing process is its intellectual property and
that auction data is already widely available to retail investors on
Nasdaq's website and through other data vendors.\357\ Although some
auction-related information may be available on Nasdaq's website, the
Commission preliminarily believes that meaningful auction information,
such as the real-time imbalance data that would support decisions
regarding order type selection and order pricing during auctions, is
available only through Nasdaq's proprietary market data products.\358\
In addition, the Commission's proposal would not require the disclosure
of any specific details about the operation of Nasdaq's crossing
process that would appropriate or compromise Nasdaq's intellectual
property. The proposed definition of auction information would require
the dissemination of information about orders participating in
auctions; \359\ the proposed definition would not require the
dissemination of information about the technology or processes used to
hold an auction. Further, the proposed definition of auction
information is based on information currently disseminated by Nasdaq.
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\357\ See supra note 347 and accompanying text.
\358\ See Nasdaq Opening and Closing Crosses, http://www.nasdaqtrader.com/Trader.aspx?id=OpenClose (last accessed Jan. 7,
2020) (providing share volume in the Nasdaq crossing network but
noting that imbalance data is available by subscription only); supra
note 338.
\359\ See Section 11A(c)(1)(C) of the Exchange Act, stating that
the Commission shall assure the usefulness of the form and content
of information with respect to quotations for and transactions in
securities. 15 U.S.C. 78k-1(c)(1)(C). The Senate Report stated that
the Commission would have the authority under Section 11A to
promulgate rules as to what information and how such information is
displayed on any tape or within any quotation system. See Senate
Report, supra note 5, at 10.
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The Commission requests comment on the inclusion of auction
information in the proposed definition of core data as well as the
proposed definition of auction information in proposed Rule 600(b)(5).
In particular, the Commission solicits comment on the following:
44. Do commenters believe that auction information should be
included in the proposed definition of core data? Why or why not? What
kinds of market participants will use this information? For what
purposes? What are the advantages or disadvantages of including auction
information in proposed core data as opposed to proprietary data?
45. Do commenters believe that the lack of auction information in
current SIP data creates significant information asymmetries between
users of current SIP data and users of proprietary data products? Do
commenters believe that current SIP data is sufficient to meet the
needs of some market participants even though it does not include
auction information? Please explain.
46. Does the lack of auction information in current SIP data create
impediments to achieving best execution when participating in auctions?
Do market participants believe that it is possible to participate in
auctions without the auction information? Please explain.
47. What are commenters' views on the Commission's proposed
definition of auction information? Does it capture the full range of
auction-related information that market participants need for informed
trading in auctions? Does it include any information that is not
necessary or useful for informed trading in auctions? Should the
Commission delineate specific data elements in the definition of
auction information as opposed to defining auction information in terms
of the auction information that is currently generated pursuant to
exchange rules or effective national market system plans?
48. Should the proposed definition of auction information include
information on orders participating in non-auction matching processes,
such as Cboe's market close order, that are related to auctions
occurring on other exchanges? Why or why not?
D. Proposed Definition of ``Regulatory Data''
As discussed above,\360\ the existing Equity Data Plans disseminate
data elements related to a number of regulatory requirements, such as
Regulation SHO, LULD, and MWCB requirements, and other information
provided by the primary listing exchanges, such as official opening and
[[Page 16760]]
closing prices. To ensure that this information is included in the
proposed definition of consolidated market data, the Commission is
proposing to amend Rule 600 to add a definition of ``regulatory data.''
Specifically, under proposed Rule 600(b)(77) of Regulation NMS,
regulatory data would be defined as: (1) Information required to be
collected or calculated by the primary listing exchange for an NMS
stock and provided to competing consolidators and self-aggregators
pursuant to the effective national market system plan or plans required
under Rule 603(b), including, at a minimum: (A) Information regarding
Short Sale Circuit Breakers pursuant to Rule 201 of Regulation SHO; (B)
information regarding Price Bands required pursuant to the LULD Plan;
(C) information relating to regulatory halts or trading pauses (news
dissemination/pending, LULD, and MWCBs) and reopenings or resumptions;
(D) the official opening and closing prices of the primary listing
exchange; and (E) an indicator of the applicable round lot size; and
(2) information required to be collected or calculated by the national
securities exchange or national securities association on which an NMS
stock is traded and provided to competing consolidators and self-
aggregators pursuant to the effective national market system plan(s)
required under Rule 603(b), including, at a minimum: (A) Whenever such
national securities exchange or national securities association
receives a bid (offer) below (above) an NMS stock's lower (upper) LULD
price band, an appropriate regulatory data flag identifying the bid
(offer) as non-executable; and (B) other regulatory messages including
sub-penny execution and trade-though exempt indicators. For purposes of
paragraph (1)(C), the primary listing exchange that has the largest
proportion of companies included in the S&P 500 Index shall monitor the
S&P 500 Index throughout the trading day, determine whether a Level 1,
Level 2, or Level 3 decline, as defined in self-regulatory organization
rules related to Market-Wide Circuit Breakers, has occurred, and
immediately inform the other primary listing exchanges of all such
declines (so that the primary listing exchange can initiate trading
halts, if necessary).\361\
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\360\ See supra Section II.C.
\361\ Because, under the proposed decentralized consolidation
model, primary listing exchanges would perform some of the functions
that the exclusive SIPs perform today (such as monitoring the S&P
500 Index), each SRO would have to collect all elements of
consolidated market data. SROs would not be required to obtain
regulatory data or other consolidated market data from competing
consolidators; SROs could choose to obtain such data directly from
other SROs.
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The primary listing exchange is an SCI entity under Regulation
Systems Compliance and Integrity (``Regulation SCI'').\362\ An SCI
entity includes any national securities exchange other than an exchange
that is notice registered with the Commission pursuant to 15 U.S.C.
78f(g) or a limited purpose national securities association registered
with the Commission pursuant to 15 U.S.C. 78o-3(k).\363\ Under
Regulation SCI, any SCI system of, or operated by or on behalf of, the
primary listing exchange that directly supports functionality relating
to trading halts, would be a ``critical SCI system.'' An ``SCI system''
means all computer, network, electronic, technical, automated, or
similar systems of, or operated by or on behalf of, an SCI entity that,
with respect to securities, directly support trading, clearance and
settlement, order routing, market data, market regulation, or market
surveillance.\364\ A ``critical SCI system'' means any SCI systems of,
or operated by or on behalf of, an SCI entity that: (1) Directly
support the functionality relating to (i) Clearance and settlement
systems of clearing agencies; (ii) Openings, reopenings, and closings
on the primary listing market; (iii) Trading Halts; (iv) Initial public
offerings; (v) The provision of consolidated market data; or (vi)
Exclusively-listed securities; or (2) Provides functionality to the
securities markets for which the availability of alternatives is
significantly limited or nonexistent and without which there would be a
material impact on fair and orderly markets.\365\ Accordingly, with
respect to any SCI systems used to determine whether LULD or MWCB
trading halts have been triggered, and to notify other SROs of such
halts, Regulation SCI requires the primary listing exchange to have
reasonably designed business continuity and disaster recovery plans
that include maintaining backup and recovery capabilities sufficiently
resilient and geographically diverse and that are reasonably designed
to achieve two-hour resumption of such systems following a wide-scale
disruption.\366\
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\362\ 17 CFR 242.1000 et seq.
\363\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000.
\364\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000.
\365\ Id.
\366\ See Rule 1001(a)(2)(v), 17 CFR 242.1001(a)(2)(v). As the
Commission stated when it adopted Regulation SCI, ``[i]n the event a
trading halt is necessary, it is essential that the systems
responsible for communicating the trading halt--typically maintained
by the primary listing market--are robust and reliable so that the
trading halt is effective across the U.S. securities markets. Thus,
systems which communicate information regarding trading halts
provide an essential service in the U.S. markets and, should a
systems issue occur affecting the ability of an SCI entity to
provide such notifications, the fair and orderly functioning of the
securities markets may be significantly impacted.'' See Regulation
SCI Adopting Release, supra note 28, at 72278.
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Market participants use this regulatory data to meet their
regulatory obligations and to be informed of trading halts, price
bands, or other market conditions that may affect their trading
activity. Accordingly, the Commission preliminarily believes that this
information should be included in the proposed definition of
consolidated market data.
1. Regulation SHO
In pertinent part, Rule 201(b) requires a trading center, including
a listing market, to establish, maintain, and enforce certain written
policies and procedures that are reasonably designed to prevent the
execution or display of a short sale order of a covered security if the
Short Sale Circuit Breaker has been triggered and further requires that
such trading center, including a listing market, regularly surveil to
ascertain the effectiveness of those policies and procedures and take
prompt action to remedy any deficiencies.
Under the proposed definition of regulatory data, the primary
listing exchange for an NMS stock (i.e., a covered security under Rule
201 of Regulation SHO) \367\ would make the determination \368\
regarding whether a Short Sale Circuit Breaker has been triggered.\369\
The Commission proposes to amend the process required under Rule 201 in
two ways. First, if the Short Sale Circuit Breaker has been triggered,
the listing market would be required to immediately notify competing
consolidators and self-aggregators (rather than a single plan processor
as is currently the case). Competing consolidators would then be
required to consolidate and disseminate this information to their
subscribers. Second, under the proposed decentralized consolidation
model with competing consolidators and self-aggregators, the listing
market would have the option of obtaining proposed consolidated market
data from one or
[[Page 16761]]
more competing consolidators (rather than from a single plan processor
as is currently the case) or, if aggregating consolidated market data
itself, to make determinations as to whether a Short Sale Circuit
Breaker has been triggered.
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\367\ A ``covered security'' is defined in Rule 201(a)(1) of
Regulation SHO as any NMS stock as defined in Rule 600(b)(48). 17
CFR 242.201(a)(1).
\368\ 17 CFR 242.201(b)(3).
\369\ Id. This is consistent with the current requirements under
Rule 201(b)(3). Rule 201(b)(3) refers to the ``listing market'' as
defined in Rule 201(a)(3). As discussed below, the Commission
proposes to amend the definition of ``listing market'' to refer to
the proposed definition of ``primary listing exchange'' in proposed
Rule 600(b)(67).
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Due to the changes proposed herein (i.e., a listing market would
now have the ability to choose from one or more competing consolidators
for proposed consolidated market data, or to aggregate proposed
consolidated market data on its own), the Commission preliminarily
believes that a trading center, including a listing market, should
consider updating its written policies and procedures required under
Rule 201(b) to address the source of core data that it uses in making
its determination regarding whether the Short Sale Circuit Breaker has
been triggered and any changes to that source of core data, including
the underlying reason for such change. The Commission preliminarily
believes that these types of updates to such written policies and
procedures would assist a listing market in ensuring consistency in
making its determination regarding whether the Short Sale Circuit
Breaker has been triggered and avoiding any appearance of ``gaming'' or
``cherry-picking'' of core data in making that determination.
Moreover, the Commission is proposing certain conforming amendments
in Rule 201 to harmonize that rule with the Commission's proposal.
Currently, Rule 201(a) defines ``listing market'' by reference to the
listing market as defined in the effective transaction reporting plan
for the covered security.\370\ Since primary listing exchanges will be
required to collect and calculate regulatory data, the Commission is
proposing to introduce a definition of ``primary listing exchange'' in
Rule 600(b)(67) to provide greater clarity with respect to the
responsibilities regarding regulatory data. Specifically, under
proposed Rule 600(b)(67), primary listing exchange would be defined as,
for each NMS stock, the national securities exchange identified as the
primary listing exchange in the effective national market system plan
or plans required under Rule 603(b).
---------------------------------------------------------------------------
\370\ 17 CFR 242.201(a)(3).
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The Commission preliminarily believes that it is appropriate for
the effective national market system plan(s) to determine which
exchange is the primary listing exchange for each NMS stock and that
the proposed definition would ensure that primary listing exchanges are
clearly identified. The Commission also preliminarily believes that the
definition of listing market in Rule 201(a)(3) should be amended so
that it cross-references this proposed definition of primary listing
exchange, so as to facilitate the consistent identification of primary
listing exchanges across Regulation SHO and Regulation NMS and to avoid
potentially duplicative or confusing definitions in the Commission's
rules.
Similarly, Rule 201(b)(1)(ii) requires Short Sale Circuit Breakers
to be applied ``the remainder of the day and the following day when a
national best bid for the covered security is calculated and
disseminated on a current and continuing basis by a plan processor
pursuant to an effective national market system plan.'' \371\ The
Commission is proposing to update this provision by removing the
reference to the plan processor to reflect the proposed decentralized
consolidation model. In addition, Rule 201(b)(3) requires listing
markets to immediately notify ``the single plan processor responsible
for consolidation of information for the covered security pursuant to
Rule 603(b)'' \372\ when a Short Sale Circuit Breaker has been
triggered. Again, as a result of the proposed decentralized
consolidation model, this reference to a single plan processor is
proposed to be removed and replaced by a requirement for the listing
market to immediately make such information available as provided in
Rule 603(b) (i.e., to competing consolidators and self-aggregators).
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\371\ 17 CFR 242.201(b)(1)(ii).
\372\ 17 CFR 242.201(b)(3).
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2. Limit Up-Limit Down Plan
Currently, the exclusive SIPs calculate and disseminate certain
LULD data pursuant to the terms of the LULD Plan.\373\ Specifically,
the exclusive SIPs calculate the price bands and reference prices and
disseminate limit state flags identifying quotes that are non-
executable, trading pause messages, and reopening information. To
ensure that this important LULD information continues to be calculated
and disseminated as part of proposed consolidated market data, the
Commission is proposing several new provisions. First, the Commission
is proposing that the primary listing exchanges be required to
calculate and disseminate the price bands and reference prices for the
LULD Plan as part of proposed regulatory data. As discussed below, the
existing exclusive SIPs would be replaced by the proposed decentralized
consolidation model with competing consolidators and self-aggregators,
and, therefore, the obligation to calculate and disseminate LULD data
would need to be shifted to another entity. Primary listing exchanges
have a direct relationship with their listed companies and are
responsible for imposing market-wide ``news pending'' and other
regulatory halts. Further, under the LULD Plan, the primary listing
exchanges currently have substantial obligations with regard to
imposing and communicating LULD trading pauses, as well as with respect
to the reopening of trading.\374\ The Commission therefore believes
that the primary listing exchanges would be well-situated to perform
these calculations as part of proposed regulatory data.
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\373\ See supra Section II.C.2.
\374\ See supra Section II.C.2.
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The LULD Plan is an important mechanism in the national market
system. The Commission preliminarily believes that having multiple
entities (e.g., competing consolidators and self-aggregators)
calculating reference prices and price bands could complicate and
potentially undermine the purposes of the LULD Plan and create
confusion during periods of market volatility. Accordingly, the
Commission believes that the LULD reference prices and price bands
should continue to be calculated and disseminated by a single entity--
the primary listing exchange. The Commission's proposal to continue to
have a single entity calculate and disseminate LULD information as part
of proposed consolidated market data and, as discussed below, to
monitor the S&P 500 Index throughout the trading day and send
notification messages to the primary listing exchanges regarding MWCBs,
is not inconsistent with the proposed decentralized consolidation model
under which multiple competing consolidators would calculate and
disseminate consolidated market data, including the NBBO. With broker-
dealers aggregating various proprietary market data products today, the
potential for ``multiple NBBOs'' already exists, whereas LULD
information is currently calculated and disseminated by a single entity
(i.e., the exclusive SIPs) and notifications to primary listing
exchanges regarding MWCBs triggered by S&P 500 Index declines are also
sent by a single entity (i.e., SIAC).
In addition, under the proposed definition of regulatory data, all
national securities exchanges or national securities associations that
receive a quote for an NMS stock that is outside of the price bands
under the LULD Plan would be required to attach the appropriate
regulatory flag signifying that the quote is non-executable and to
[[Page 16762]]
provide the quote and appropriate flag as part of its regulatory data
to competing consolidators and self-aggregators. The Commission
preliminarily believes that each national securities exchange or
national securities association is in the best position to perform the
function of attaching a flag to its own quote. The Commission
preliminarily believes that assigning the responsibility to identify
quotes as non-executable to parties other than the SRO disseminating
the quote could add latency and complexity to the process and increase
the risk of error.
3. Market-Wide Circuit Breakers
Today, SIAC (the CTA/CQ SIP) monitors the S&P 500 Index to
determine whether a Level 1, Level 2, or Level 3 decline has occurred
and is responsible for sending messages to the primary listing
exchanges informing them of such declines.\375\ Under the proposed
decentralized consolidation model, there would no longer be an
exclusive SIP to perform this function. Accordingly, the proposed
definition of regulatory data identifies a specific primary listing
exchange to monitor the S&P 500 Index throughout the trading day,
determine whether a Level 1, Level 2, or Level 3 decline, as defined in
SRO rules related to MWCB, has occurred, and immediately inform the
other primary listing exchanges of all such declines. Specifically, the
primary listing exchange that has the largest proportion of companies
included in the S&P 500 Index would be required to conduct this
monitoring and notification function.\376\ As discussed above, the
Commission preliminarily believes that these responsibilities should
continue to be carried out by a single entity so that messages
regarding the occurrence of Level 1, Level 2, or Level 3 declines are
distributed to primary listing exchanges simultaneously from the same
source, to avoid the complexity and confusion that might result if such
messages were distributed from multiple parties during periods of
market volatility. The Commission preliminarily believes that it is
appropriate to allocate these functions to the primary listing exchange
that has the largest proportion of companies included in the S&P 500
Index because a significant proportion of the monitoring would be
related to its own listings.
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\375\ By contrast, rather than the exclusive SIP notifying the
primary listing exchange, under LULD, if trading for an NMS stock
does not exit a limit state within 15 seconds of entry during
regular trading hours, then the primary listing exchange is required
to declare a trading pause in that NMS stock and notify the
exclusive SIP.
\376\ NYSE currently lists the largest proportion of companies
in the S&P 500 Index. If this changes, NYSE and the other primary
listing exchange would need to coordinate to ensure that these
monitoring and notification responsibilities are transitioned
effectively.
---------------------------------------------------------------------------
In addition, under the proposed definition of regulatory data, each
primary listing exchange would be responsible for providing certain
information required under the MWCB rules to competing consolidators
and self-aggregators. Specifically, each primary listing exchange would
be required to provide MWCB trading halt and resumption messages to
competing consolidators and self-aggregators, just as they do with the
exclusive SIPs today.
4. Other Regulatory Data
Official opening and closing prices are closely tracked data
elements used by market participants for a variety of purposes. The
primary listing exchanges currently determine the official opening and
closing prices for their listed stocks \377\ and provide these data
elements to the exclusive SIPs. In addition to Regulation SHO, LULD,
and MWCB information, the proposed definition of regulatory data will
also require primary listing exchanges to provide the official opening
and closing prices for the NMS stocks they list to competing
consolidators and self-aggregators. The Commission preliminarily
believes that the primary listing exchanges, because they determine the
official opening and closing prices for their listed stocks and have
direct and immediate access to this information, are best situated to
provide official opening and closing prices in their listed securities
to competing consolidators and self-aggregators under the decentralized
consolidation model so that this important information is included in
the proposed consolidated market data made available to market
participants.
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\377\ See, e.g., NYSE Rule 123C(1)(e)(i) (Closing Procedures);
NYSE Rule 123D(a) (Openings); Nasdaq Rule 4754(b)(4) (Nasdaq Closing
Cross); Nasdaq Rule 4752(d) (Opening Process).
---------------------------------------------------------------------------
In addition, the proposed definition of regulatory data would
require the primary listing exchange for each NMS stock to calculate
and make available to competing consolidators and self-aggregators an
indicator of the applicable round lot size. As discussed above, the
proposed definition of round lot would allocate stocks into five round
lot categories based on each stock's average closing price on the
primary listing exchange over the prior calendar month. The Commission
preliminarily believes that such an indicator would help market
participants ascertain the applicable round lot size for each NMS stock
on an ongoing basis.\378\ Due to the primary listing exchanges' direct
and immediate access to the official opening and closing prices of
their listed stocks, the primary listing exchanges would be well-
situated to calculate the monthly average closing price, the metric
that will be used to allocate NMS stocks into round lot sizes under the
proposed definition of round lot; assign a round lot size of 100, 20,
10, 2, or 1, as applicable; and include an indicator of the applicable
round lot size in the data they make available to competing
consolidators and self-aggregators.
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\378\ Among other reasons, market participants would need to be
aware of the applicable round lot size under the proposed amendments
because several Commission rules would apply to round lot orders.
See supra Section III.C.1(d)(i) (discussing the impact of the
proposed definition of round lot on Rules 602, 603, 604, and 605 of
Regulation NMS).
---------------------------------------------------------------------------
The proposed definition of regulatory data would also require an
exchange or association on which an NMS stock is traded to provide
other data pertaining to regulatory requirements, including sub-penny
execution indicators and trade-though exempt indicators. Additional
regulatory messages such as these are included in the technical
specifications of the Equity Data Plans. The Commission preliminarily
believes that all of these regulatory messages provide important
information to the market and facilitate compliance with regulatory
requirements. Therefore, the Commission preliminarily believes that
such regulatory messages should be included in the proposed definition
of consolidated market data.
Finally, as discussed above,\379\ as the markets continue to
evolve, there may be a need to reflect new regulatory data elements in
proposed consolidated market data. Accordingly, the Commission is
proposing that the definition of regulatory data include a provision
(as set forth in proposed consolidated market data) that would allow
the definition of regulatory data to be amended to include additional
regulatory data elements pursuant to amendments to effective national
market system plan(s). As discussed above, amendments to effective
national market system plans must be filed with, and approved by, the
Commission pursuant to Rule 608(b).
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\379\ See supra Section III.B.
---------------------------------------------------------------------------
The Commission requests comment on the proposed definition of
regulatory data in proposed Rule 600(b)(77). In particular, the
Commission solicits comment on the following:
[[Page 16763]]
49. Do commenters believe that the elements of proposed regulatory
data enumerated in proposed Rule 600(b)(77) reflect the elements that
are necessary for trading in compliance with Commission rules, Equity
Data Plans, or SRO rules? Why or why not? Should any additional data
elements be included? Is there any significant regulatory information
that is currently included in SIP data, including pursuant to the
technical specifications to the Equity Data Plans, which is not
captured by the proposed definition of regulatory data? If so, should
such elements be included in the proposed definition of regulatory
data? Please describe.
50. Should any of the proposed elements of regulatory data be
excluded? Please explain.
51. Do commenters believe that the primary listing exchange should
be responsible for calculating regulatory data, as defined? Why or why
not? Would any of those responsibilities be more effectively allocated
to competing consolidators? Do commenters believe another party should
perform these calculations? Would the proposed definition of regulatory
data impose any additional costs on primary listing exchanges?
52. In the context of the Short Sale Circuit Breaker, what benefits
and/or challenges do commenters believe will result from the proposed
change to a competing consolidator/self-aggregator model? Do primary
listing exchanges anticipate utilizing a consistent source of core data
in making their determination regarding whether a Short Sale Circuit
Breaker has been triggered? Or multiple sources? Please describe.
53. Will updating the primary listing exchange's existing Rule 201
written policies and procedures, as discussed above, present any
operational (or other) challenges? If yes, please describe.
54. Would a round lot size indicator be useful to market
participants and investors? Why or why not?
55. Do commenters believe that the primary listing exchange that
has the largest proportion of companies included in the S&P 500 Index
should be required to perform the MWCB-related functions described in
the proposed definition of regulatory data? Why or why not? Should the
primary listing market be determined by weighting the companies
included in the S&P 500 Index? Why or why not? Do commenters believe
that at least one other market should calculate this information as a
backup contingency? Are there alternative approaches to the assignment
of the S&P 500 Index monitoring and notification function? Would it be
more appropriate to assign this function to another party? If so,
please explain how any such other party could appropriately perform
this function.
56. Do commenters believe that each national securities exchange
and national securities association receiving a quote outside the price
bands under the LULD Plan should be required to flag each quote as non-
executable? Why or why not? Are there alternative approaches to the
assignment of the non-executable quote flagging function? Would it be
more appropriate to assign this function to another party? If so,
please explain how any such other party could appropriately perform
this function.
E. Proposed Definition of ``Administrative Data''
In addition to current core data and current regulatory data, SIP
data today includes additional technical information. Much of this
information is enumerated in the technical specifications of the Equity
Data Plans and described as ``administrative'' or ``control'' messages.
Examples of administrative messages include market center and issue
symbol identifiers.\380\ Examples of control messages include messages
regarding the beginning and end of trading sessions.\381\ The
Commission preliminarily believes that administrative messages can
facilitate the efficient and accurate use of consolidated market data
by market participants and should be included in the proposed
definition of consolidated market data. Further, the Commission
preliminarily believes that this information is useful to market
participants and should continue to be widely available. The proposed
definition is intended to capture administrative information that is
currently provided in SIP data.\382\ In order to capture this type of
information, under proposed Rule 600(b)(2), ``administrative data''
would be defined as administrative, control, and other technical
messages made available by national securities exchanges and national
securities associations pursuant to the effective national market
system plan or plans required under Section 242.603(b) or the technical
specifications thereto as of [date of Commission approval of this
proposal].
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\380\ See, e.g., UTP Data Feed Services Specification, supra
note 142, at 20.
\381\ Id. at 33.
\382\ As discussed above, administrative data elements could be
added to consolidated market data pursuant to amendments to the
effective national market system plan or plans required under
Section 242.603(b). See supra Section III.B.
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The Commission preliminarily believes that administrative data, as
proposed to be defined and as currently exists, provides additional
context for market participants to understand, and efficiently and
accurately use, the proposed core and regulatory data to support their
trading activities. For example, issue symbol and market center
identifiers provide basic information necessary to understand to which
stock the price and size information represented in core data relates
and the specific exchange on which this interest is available, which
informs decisions about where orders in such stocks should be directed.
As such, this information should continue to be included in the
proposed definition of consolidated market data. Moreover, the
Commission preliminarily believes that SROs would be well-situated to
provide administrative data messages, which relate to SRO-specific
details such as the market-center identifiers or the beginning and
ending of trading sessions, because SROs have direct and immediate
access to this information and could efficiently integrate it into the
data feeds that they will utilize to make available the data necessary
for competing consolidators and self-aggregators to generate core and
regulatory data.
The Commission requests comment on the proposed amendment to Rule
600(b)(2) to introduce a definition of administrative data. In
particular, the Commission solicits comment on the following:
57. Do commenters believe that the Commission should propose a
definition of administrative data? Why or why not? Should the
Commission take an alternative approach? Why or why not?
58. Do commenters believe that the proposed definition of
administrative data captures the market data that would be necessary or
useful to market participants? Please explain. Does the proposed
definition of administrative data include any market data that should
not be included? Please explain.
59. Do commenters believe that each national securities exchange
and national securities association should make available
administrative data? Should any of the elements be provided by the
primary listing exchange? Are there specific administrative data
elements that should be consistent across all SROs? Are there any
administrative data elements that competing consolidators or some other
party, as opposed to national securities exchanges and national
securities
[[Page 16764]]
associations, should be required to generate or provide for inclusion
in proposed consolidated market data? Please explain.
60. Do commenters believe that there are administrative data
elements that should not require an NMS Plan amendment for inclusion in
consolidated market data? For example, are there administrative data
elements that are provided solely in the course of providing or
utilizing other consolidated market data elements, such as core or
regulatory data? Please explain. What procedural mechanism would be
appropriate for including any such data elements in consolidated market
data? How could any such data elements be distinguished from those
which would require an NMS Plan amendment to be added to consolidated
market data?
F. Proposed Definition of ``Exchange-Specific Program Data''
In addition to current core data, regulatory data, and
administrative data, current SIP data includes information related to
individual exchange retail liquidity programs, which offer
opportunities for retail orders to receive price improvement.\383\ The
Commission preliminarily believes that existing retail liquidity
programs and, in certain cases, other exchange-specific program
information should continue to be included in proposed consolidated
market data and is therefore proposing to define ``exchange-specific
program data'' to include this information. Under proposed Rule
600(b)(32), exchange-specific program data, which would be included in
the proposed definition of consolidated market data, would be defined
as (i) information related to retail liquidity programs specified by
the rules of national securities exchanges and disseminated pursuant to
the effective national market system plan or plans required under
Section 242.603(b) as of [date of Commission approval of this proposal]
and (ii) other exchange-specific information with respect to quotations
for or transactions in NMS stocks as specified by the effective
national market system plan or plans required under Section 242.603(b).
---------------------------------------------------------------------------
\383\ See, e.g., CQS Binary Input Specifications (July 17,
2019), at 37 (describing a ``retail interest indicator'' as follows:
``[w]hen Retail Price Improvement (RPI) interest is priced better
than the Protected Best Bid or Offer (PBBO) by a minimum of $0.001,
an indication of interest on the Bid, Offer, or both the Bid and
Offer will identify that interest will be eligible to interact with
incoming Retail Order interest.''); supra note 47; NYSE Rule 107C;
Securities Exchange Act Release No. 67347 (July 3, 2012), 77 FR
40673 (July 10, 2012) (NYSE Retail Liquidity Program Approval
Order); CBOE BYX Rule 11.24; Securities Exchange Act Release No.
68303 (Nov. 27, 2012), 77 FR 71652 (Dec. 3, 2012) (CBOE BYX Retail
Pilot Program Approval Order); Nasdaq BX Rule 4780; Securities
Exchange Act Release No. 73702 (Nov. 28, 2014), 79 FR 72049 (Dec. 4,
2014) (NASDAQ BX Retail Pilot Program Approval Order). For example,
NYSE's retail liquidity program defines a class of market
participants known as Retail Liquidity Providers who may provide
potential price improvement, in the form of a non-displayed order
that is priced better than NYSE's best protected bid or offer called
a Retail Price Improvement Order. See NYSE Rule 107C; NYSE Retail
Liquidity Program Approval Order. Other NYSE members are allowed,
but not required, to submit Retail Price Improvement Orders. Id.
When there is a Retail Price Improvement Order in a particular
security, NYSE disseminates an indicator, which is included in the
SIP data, known as the Retail Liquidity Identifier, indicating that
such interest exists. In response, a class of market participants
known as Retail Member Organizations can submit a special type of
order, called a Retail Order, to the exchange. A Retail Order would
interact, to the extent possible, with available contra-side Retail
Price Improvement Orders. Id.
---------------------------------------------------------------------------
Proposed Rule 600(b)(32)(i) pertains to information related to
existing exchange retail liquidity programs that is currently
disseminated pursuant to the Equity Data Plans. The dissemination of
retail liquidity identifiers in the current SIP data encourages market
participants to submit orders to, or otherwise participate in, such
programs that the Commission has approved as consistent with the
Exchange Act, including the dissemination of the related retail
liquidity program information as SIP data.\384\ The proposed definition
of exchange-specific program information would help ensure that the
retail liquidity program information that is currently included in SIP
data would be included in consolidated market data.
---------------------------------------------------------------------------
\384\ See NYSE Retail Liquidity Program Approval Order, supra
note 383 (stating that ``the Retail Liquidity Identifier will be
disseminated through the consolidated public market data stream, and
thus be widely viewable by market participants, and that members of
the Exchanges that would not otherwise participate as Retail
Liquidity Providers would be able to participate in the Program by
submitting Retail Price Improvement Orders'').
---------------------------------------------------------------------------
In addition, to the extent that an exchange, at its own discretion,
determines to develop a new exchange-specific program in the future,
proposed Rule 600(b)(32)(ii) would permit data elements related to any
such program to be included in consolidated market data pursuant to the
national market system plan or plans required under Section 242.603(b)
or amendments thereto that are approved by the Commission. The
Commission preliminarily believes that, to the extent that (i)
exchanges develop new programs in the future,\385\ and (ii) the broad
dissemination of information about such programs as part of
consolidated market data would facilitate participation in such
programs, an amendment to the effective national market system plan(s)
could be filed with the Commission under Rule 608 of Regulation NMS to
include such information in consolidated market data. Accordingly, the
Commission preliminarily believes that this information is useful and
should be included in the definition of consolidated market data as
proposed.
---------------------------------------------------------------------------
\385\ See supra note 92 and accompanying text. Currently, the
only exchange-specific program data disseminated pursuant to the
Equity Data Plans relates to retail liquidity programs.
---------------------------------------------------------------------------
The Commission requests comment on the proposed amendment to Rule
600(b)(32) to introduce a definition of exchange-specific program data.
In particular, the Commission solicits comment on the following:
61. Do commenters believe that the proposed exchange-specific
program data should be included in proposed consolidated market data?
Why or why not?
62. Do commenters believe that information related to retail
liquidity programs currently established pursuant to exchange rules
should be included in the proposed definition of exchange-specific
program data? Why or why not? Do commenters believe that the inclusion
of data elements related to these programs in current SIP data is
useful for trading or investment decisions? Please explain.
63. Do commenters believe that the proposed definition of exchange-
specific program data should permit data elements related to new
exchange-specific programs that may be established to be included in
consolidated market data pursuant to amendments to the effective
national market system plan or plans required under Section 242.603(b)?
Why or why not?
IV. Need for and Proposed Enhancements to Provision of Consolidated
Market Data
The Commission is proposing to replace the existing centralized,
exclusive consolidation model for SIP data \386\ with a decentralized,
competitive consolidation model. The Commission preliminarily believes
this model would foster competition in the consolidation and
dissemination of proposed consolidated market data, better serve the
needs of market participants and investors, and help mitigate the
influence of certain conflicts of interest inherent in the existing
exclusive SIP model.\387\ The Commission also preliminarily believes
[[Page 16765]]
that the proposed approach would modernize the infrastructure of the
national market system by eliminating the existing, outdated
centralized architecture for data consolidation and fostering the use
of more competitive technologies for the collection, consolidation, and
dissemination of proposed consolidated market data. Together, these
would reduce latency differentials that currently exist between SIP
data and proprietary data. Furthermore, the Commission preliminarily
believes that this model will address concerns about the significant
costs that accompany the exclusive \388\ structure that currently
exists for the aggregation and dissemination of SIP data.
---------------------------------------------------------------------------
\386\ See supra Sections I and II.A.
\387\ These conflicts of interest are discussed in Section
VI.A.2 infra.
\388\ See Bloomberg Decision, supra note 37, at 3, 4. See also
infra note 439.
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A. Existing Centralized Consolidation Model
Today, SIP data is collected, consolidated, and disseminated to
investors and market participants through a centralized consolidation
model with an exclusive SIP for each NMS stock centrally collecting
market data transmitted from the dispersed SRO data centers and then
redistributing consolidated SIP data to end-users. Each exchange and
FINRA is required to transmit its own data for each NMS stock to the
appropriate exclusive SIP.\389\ As provided under Rule 603(b), the
exclusive SIPs do not compete with each other in the collection,
consolidation, or dissemination of SIP data.\390\
---------------------------------------------------------------------------
\389\ See supra note 42 and accompanying text.
\390\ See supra note 21. The Senate Report stated that an
exclusive processor of market information is, ``in effect, a public
utility, and thus it must function in a manner which is absolutely
neutral with respect to all market centers, all market makers, and
all private firms.'' See Senate Report, supra note 5, at 7.
---------------------------------------------------------------------------
For many years, this centralized consolidation model served
investors well by providing an accurate, reliable, and fair stream of
SIP data that was considered prompt relative to the prevailing
technological standards of the time. Technological advances as well as
the order routing and trading strategies that developed in response to
the adoption of Regulation NMS have greatly increased the speed and
automation of both markets and common trading strategies. These
changes, along with the provisions adopted in Regulation NMS that allow
for the sale of proprietary data products,\391\ have created incentives
for exchanges to develop enhanced proprietary data products that they
sell to the same market participants that are subscribers to the SIP
data, and to offer connectivity products and services (e.g., co-
location, fiber connectivity, and wireless connectivity) that provide
low-latency access to the proprietary data products. Further, as the
markets evolved and depth of book data became more important for some
market participants, the exchanges continued to improve their
proprietary data feeds without similarly improving the exclusive SIPs
to reflect this market evolution. The content and latency differentials
between SIP data and the proprietary market data products disseminated
directly by the exchanges have become increasingly material.\392\
---------------------------------------------------------------------------
\391\ See Regulation NMS Adopting Release, supra note 10, at
37567.
\392\ See infra Section VI.B.2(b).
---------------------------------------------------------------------------
There are widespread and significant concerns about the current
method of disseminating SIP data and its associated latencies.\393\ The
centralized consolidation model of the Equity Data Plans and the
exclusive SIPs suffers from three specific sources of latency
disadvantage: (a) Geographic latency, (b) aggregation or consolidation
latency, and (c) transmission or communication latency.
---------------------------------------------------------------------------
\393\ See, e.g., Letter to Brent J. Fields, Secretary,
Commission, from Tyler Gellasch, Executive Director, Healthy Markets
Association, 6 (Oct. 23, 2018) (``Healthy Markets Association Letter
I'') (``SIP data feeds are still persistently slower and offer less
information than is available through the private data feeds and
connectivity offerings sold by the exchanges.'').
---------------------------------------------------------------------------
Geographic latency, as used herein, refers to the time it takes for
data to travel from one physical location to another, which must also
take into account that data does not always travel between two
locations in a straight line. Greater distances usually equate to
greater geographic latency, though geographic latency is also affected
by the mode of data transmission, as discussed below. The Commission
understands that geographic latency is typically the most significant
component of the additional latency that SIP data feeds experience
compared to proprietary data feeds.\394\ Because each exclusive SIP
must collect data from geographically-dispersed SRO data centers,
consolidate the data, and then disseminate it from its location to end-
users, which are often in other locations, this hub-and-spoke form of
centralized consolidation creates additional latency.\395\ For example,
information about quotes and trades on Nasdaq for NYSE-listed
securities incurs latency as it travels from Nasdaq's data center in
Carteret approximately 34.5 miles to the CTA/CQ SIP in Mahwah, and then
back to Carteret.\396\
---------------------------------------------------------------------------
\394\ See, e.g., Letter to Brent J. Fields, Secretary,
Commission, from Michael Blaugrund, Head of Transactions, New York
Stock Exchange, 1 (Oct. 24, 2018) (``Blaugrund Letter'') (stating
that, as ``processing time approaches zero, it is clear that the
time required for trade and quote data to travel from Participant
datacenter -> SIP datacenter -> Recipient datacenter, or `geographic
latency,' is a larger portion of the total latency.'').
\395\ One commenter has stated ``[w]hile it is true that the
latencies of the SIPs are slightly greater than those of direct
exchange feeds, it is important to remember that the SIPs are a
consolidation of all market data feeds, not a single feed.
Therefore, the SIPs must first aggregate data from multiple
exchanges located in geographically disparate data centers before
processing and transmitting it to the market, which means their
feeds will always be, by definition, slightly slower than the data a
user can receive directly from an exchange.'' See Statement from the
SIP Operating Committees Adding to SEC Commissioner Jackson's Recent
Comments (Sept. 24, 2018), available at https://www.nyse.com/publicdocs/ctaplan/notifications/trader-update/Media_Statement_from_SIP_Operating_Committees_Chair_Emily_Kasparov.pdf; Nasdaq, Total Markets Report, supra note 127, at 20.
\396\ See Roundtable Day One Transcript at 127 (Mark Skalabrin,
Redline Trading Solutions) (stating that customers cannot be
competitive using SIP data due to geographic latency, explaining
``[i]f you're sitting at Secaucus and you get a direct feed tick
from BATS, it shows up in a few microseconds from when they publish
it. That same tick for the SIP for Nasdaq-listed symbols goes to
Carteret, for NYSE-listed symbols they go to Mahwah and they come
back again. The real numbers are, for one, about 350 microseconds
and the other about close to a millisecond in latency for those to
show up for someone using the SIP to get the BATS tick. So this is
just an architectural--an obsolete architecture, really, for an
automated trading system in today's world . . . you can't be
competitive with those kind of latencies compared to just getting it
directly from the exchange.'').
---------------------------------------------------------------------------
Aggregation or consolidation latency, as used herein, refers to the
amount of time an exclusive SIP takes to aggregate the multiple sources
of SRO market data into SIP data and includes calculation of the NBBO.
This latency reflects the time interval between when an exclusive SIP
receives data from an SRO and when it disseminates SIP data to the end-
user. For years, market participants have claimed that the exclusive
SIP aggregation speeds have remained measurably slower and
uncompetitive with private market offerings.\397\ For
[[Page 16766]]
example, in the second quarter of 2010, the average aggregation latency
\398\ for the Tapes A and B quotes and trades feeds exceeded 6,000
microseconds, and the Tape C feeds exceeded 5,500 microseconds.\399\ In
recent years, the Equity Data Plans operating committees have made some
improvements to aspects of the exclusive SIPs and related
infrastructure, including to address aggregation latency.\400\ For
example, as of the second quarter of 2019, Tapes A and B reduced
average quote feed aggregation latency to 69 microseconds and trade
feed aggregation latency to 139 microseconds.\401\ As another example,
Tape C reduced its average quote feed aggregation latency to an average
of 16.9 microseconds for quotes and 17.5 microseconds for trades in the
second quarter of 2019.\402\ As shown by these latency statistics,
however, aggregation latency for the CTA/CQ SIP data continues to be
meaningfully greater than that of Nasdaq UTP SIP data, despite these
improvements.\403\
---------------------------------------------------------------------------
\397\ See Joel Hasbrouck, Price Discovery in High Resolution,
New York University (Aug. 9, 2019 draft) (``The first analysis
examines the extent to which the conventional source of market data
(the consolidated tape) accurately reflects the prices observed by
agents who subscribe (at additional cost) to direct exchange feeds.
At a one-second resolution, the information share of the direct
feeds is indistinguishable from that of the consolidated tape. At
resolutions of 100 and 10 microseconds, however, the direct feeds
are totally dominant, and the consolidated share approaches
zero.''); Elaine Wah and Michael P. Wellman, Latency Arbitrage,
Market Fragmentation, and Efficiency: A Two-Market Model, University
of Michigan (2013) (``Given order information from exchanges, the
SIP takes some finite time, say [X] milliseconds, to compute and
disseminate the NBBO. A computationally advantaged trader who can
process the order stream in less than [X] milliseconds can simply
out-compute the SIP to derive NBBO*, a projection of the future NBBO
that will be seen by the public. By anticipating future NBBO, an HFT
algorithm can capitalize on cross-market disparities before they are
reflected in the public price quote, in effect jumping ahead of
incoming orders to pocket a small but sure profit.''); Herbert Lash,
Potential Profit from U.S. ``Latency Arbitrage'' Trading May Be $3
Billion--Study, Reuters (Feb. 25, 2016).
\398\ Average latency is only one latency metric. Another metric
for the use of evaluating the performance of the exclusive SIP is
latency at the 99th percentile, which means that 99% of exclusive
SIP latency observations for a given period were below that value.
The 99th percentile is often reflective of periods of peak message
traffic. These outlier periods tend to be among the more important
trading periods during the day, and exclusive SIP latencies have
tended to lag in performance during these periods. For example, in
the second quarter of 2019, the latency measurement at the 99th
percentile for Tapes A and B trades was 648 milliseconds, which is
over 4 times slower than the average latency. See CTA, Key Operating
Metrics of Tape A&B U.S. Equities Securities Information Processor
(CTA SIP), available at https://www.ctaplan.com/publicdocs/CTAPLAN_Processor_Metrics_2Q2019.pdf (last accessed Jan. 22, 2020).
\399\ Id.; see also UTP Q4 2016--Dec. Tape C Quote and Trade
Metrics, available at http://www.utpplan.com/DOC/UTP_website_Statistics_-_Q4_2016_-_December.pdf (last accessed Jan.
22, 2020).
\400\ One commenter stated, ``In the last three years, the SIP
Operating Committees have invested in the technology that powers
them, increasing resiliency and redundancy while reducing latency .
. .'' See Statement from the SIP Operating Committees Adding to SEC
Commissioner Jackson's Recent Comments, supra note 395. Following
the Nasdaq UTP SIP Outage--and a meeting between the equities and
options exchanges, FINRA, DTCC, the Options Clearing Corporation,
and the then-Chair of the Commission--the Equity Data Plans'
operating committees discussed with Commission staff the operating
committees' plans for the exclusive SIPs ``designed to improve
operational resiliency, strengthen interoperability standards and
disaster recovery capabilities, enhance governance, accountability,
and establish a clear testing framework for the industry.'' See
Self-Regulatory Organizations Response to SEC for Strengthening
Critical Market Infrastructure (Nov. 12, 2013), available at https://ir.theice.com/press/press-releases/all-categories/2013/11-12-2013;
NYSE Group Letter, at 3 (``[E]xchanges have invested significantly
in the operation of the [SIPs], resulting in improved resilience and
reduced latency, all while managing increased volumes.''); infra
Section VI.B.
\401\ See CTA, Key Operating Metrics of Tape A&B U.S. Equities
Securities Information Processor (CTA SIP), available at https://www.ctaplan.com/publicdocs/CTAPLAN_Processor_Metrics_2Q2019.pdf
(last accessed Jan. 22, 2020).
\402\ See UTP Q3 2019--July Tape C Quote and Trade Metrics,
available at http://www.utpplan.com/DOC/UTP_website_Statistics_Q3-2019-July.pdf (last accessed Jan. 22, 2020). Nasdaq has stated that
the Nasdaq UTP SIP is ``faster at processing quote and trade
messages than any Nasdaq-owned exchange trading system'' with an
average SIP processing time of 16 microseconds, compared to 25
microseconds ``from entry of an order on the Nasdaq stock market
until the associated quotation or execution or execution message is
transmitted on the exchange's proprietary TotalView data feed.'' See
Wittman Letter at 9. These latencies are perceived to be at or near
competitive market standards. See also Roundtable Day One Transcript
at 106 (statement of Oliver Albers, Nasdaq) (``There have been vast
improvements in SIP data in recent years, even as SIP revenue to
exchanges has fallen. The Nasdaq UTP SIP has an average latency of
just 16 millionths of a second . . . The Nasdaq UTP SIP can also
handle 10 billion messages per day, 20 times more than a decade ago,
and significant cybersecurity and fraud prevention investments by
Nasdaq and other operators have increased the overall market
efficiency and resiliency.'').
\403\ See Nasdaq Total Markets Report, supra note 127, at 19,
n.19 (stating that the CTA/CQ SIP ``currently operates with over 100
microseconds of latency, which is not up to the standard that
investors have come to expect in the modern markets.'').
---------------------------------------------------------------------------
Transmission latency, as used herein, refers to the time interval
between when data is sent (e.g., from an exchange) and when it is
received (e.g., at an exclusive SIP and/or at the data center of the
subscriber), and the transmission latency between two fixed points is
determined by the transmission communications technology through which
the data is conveyed. Transmission latency will also vary depending on
the geographic distance between where the data is sent and where it is
received. There are several options currently used for transmitting
market data, such as fiber optics, which typically are used by the
exclusive SIPs for receipt and dissemination of SIP data, and wireless
microwave connections, which the exchanges offer as an alternative for
their proprietary data feeds but not for SIP data. Fiber optics use
light to transmit data through glass fiber cables. Wireless microwave
connections (including extremely high frequency millimeter waves)
transmit data through the air via towers in line of sight of one
another and are commonly used to transmit market data today. Fiber
optics are generally more reliable than wireless networks since the
data signal is less affected by weather; \404\ however, fiber tends to
suffer greater latency because of its dependence on geography: The
cables often cannot be laid in the most direct manner, adding distance
for the signal to travel. Light also travels slower through fiber than
microwaves travel through the air. Laser transmission, a more recent
addition to high speed market data transmission, is another wireless
mode of transmission that is known to be faster than microwaves but
less susceptible to weather conditions.\405\
---------------------------------------------------------------------------
\404\ See Andriy Shkilko and Konstantin Sokolov, Every Cloud Has
a Silver Lining: Fast Trading, Microwave Connectivity and Trading
Costs (Apr. 2019), available at https://ssrn.com/abstract=2848562.
\405\ See Reuters, Lasers, Microwave Deployed in High-Speed
Trading Arms Race (May 1, 2013), available at https://www.reuters.com/article/us-highfrequency-microwave/lasers-microwavedeployed-in-high-speed-trading-arms-race-idUSBRE9400L920130501; ExtremeTech, New Laser Network between NYSE
and Nasdaq Will Allow High-Frequency Traders to Make Even More Money
(Feb. 14, 2014), available at https://www.extremetech.com/extreme/176551-new-laser-network-between-nyse-andnasdaq-will-allow-high-frequency-traders-to-make-even-more-money; ``The World's First Laser
Network for Transporting Equities Market Data between Nasdaq and
BATS/DirectEdge is Now Live and Operational'' (July 22, 2015),
available at https://anovanetworks.com/the-worlds-first-laser-network-for-transporting-equities-market-data-between-nasdaq-batsdirectedge-is-now-live-operational/; ICE Global Network: New
Jersey Metro, available at https://www.theice.com/market-data/connectivity-and-feeds/wireless/new-jersey-metro (last accessed Jan.
22, 2020).
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[[Page 16767]]
The modes of transmission for SIP data are typically slower than
the modes of transmission used for proprietary data. For example,
proprietary data products offered by the exchanges often rely on low-
latency wireless connections,\406\ whereas the Equity Data Plans rely
on fiber optics for connectivity.\407\ Additionally, the NYSE, as the
operator of the CTA/CQ SIP, has required that access to the CTA/CQ SIP
be through the use of the NYSE's IP local area network. Recently, the
NYSE submitted a proposed rule change to amend its prices related to
co-location services to provide access to NMS feeds. The NYSE stated in
that proposed rule change that the operating committee of the CTA and
CQ Plans instituted this access requirement because of the IP network's
security, resiliency, and redundancy.\408\ The NYSE stated that the IP
network is not a low-latency network, so ``the requirement to use the
IP network to access the NMS feeds introduces a layer of latency.''
\409\ The NYSE stated that it is in the process of building a low-
latency network alternative to connect to the CTA/CQ SIP that would
result in a one-way latency reduction of over 140 microseconds.\410\
---------------------------------------------------------------------------
\406\ Some of these services are solely offered by exchanges
within the facility of an exchange (e.g., co-location connectivity
at NYSE's data center in Mahwah and Nasdaq's co-location at its data
center in Carteret) and some are offered by both exchanges and other
third party providers (e.g., fiber and wireless connectivity between
data centers). See, e.g., Nasdaq Trade Management Services--Wireless
Connectivity Suite, available at http://n.nasdaq.com/WirelessConnectivitySuite (last accessed on Jan. 22, 2020)
(describing low-latency wireless network technology to deliver
market data); ICE Global Network--Wireless, available at https://www.theice.com/market-data/connectivity-and-feeds/wireless (last
accessed on Jan. 22, 2020) (describing low-latency wireless
connectivity options between trading hubs).
\407\ See Roundtable Day One Transcript at 99 (Stacey
Cunningham, NYSE) (``[i]n the short term, we could use wireless
technology to deliver SIP and overcome some of the geographic
latencies.''); at 156-157 (Oliver Albers, Nasdaq) (stating that
Nasdaq could consider permitting microwave transmission from the
exchanges to the Nasdaq UTP SIP); ICE Global Network & Colocation:
Technical Specifications (Oct. 2019), available at https://www.nyse.com/publicdocs/data/IGN_Colo_US_Technical_Specifications.pdf.
\408\ See NYSE Low-Latency SIP Filing, supra note 47. NYSE
currently assesses the following colocation fees for access to the
IP network: (1) For a 1 gb circuit, $2,500 per connection initial
charge plus $2,500 monthly per connection; (2) for 10 gb circuit,
$10,000 per connection initial charge plus $11,000 monthly per
connection; and (3) for a 40 gb circuit, $10,000 per connection
initial charge plus $18,000 monthly per connection. See NYSE Price
List 2020, available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf (last accessed Jan. 22, 2020).
\409\ See NYSE Low-Latency SIP Filing, supra note 47, at 47594.
The filing defines ``NMS feeds'' to include the data streams of the
Consolidated Tape System, the Consolidated Quote System, and the
Options Price Reporting Authority (``OPRA'').
\410\ Id. The Commission understands this to mean that,
currently, each of the CTA/CQ Plan participants must transmit its
data through connectivity options that have a round-trip latency of
at least 280 microseconds [140 microsecond one-way latency) * 2 =
280 microsecond round-trip latency]. The Commission believes that
this is in addition to the transmission latency that is in the
published CTA average aggregation latency metrics of between 69
microseconds for the quote feed and 139 microseconds for the trade
feed. See CTA, Key Operating Metrics of Tape A&B U.S. Equities
Securities Information Processor (CTA SIP), supra note 398
(regarding the second quarter of 2019). The round-trip latency of
280 microseconds would increase the 2Q19 realized CTA aggregation
latency to 349 microseconds (from 69 microseconds) for the quotes
feed and 419 microseconds (from 139 microseconds) for the trade
feed. At the same time, the Commission understands that NYSE, which
owns the CTA/CQ SIP, offers non-SIP proprietary data transmission to
end-users via faster microwave networks. See, e.g., ICE Global
Network: Chicago--New Jersey, available at https://www.theice.com/market-data/connectivity-and-feeds/wireless/chicago-to-new-jersey
(last accessed Jan. 22, 2020) (describing ICE's microwave route
between the Chicago metro trading hub to Nasdaq's data center in
Carteret, NJ); ICE Global Network: New Jersey Metro, available at
https://www.theice.com/market-data/connectivity-and-feeds/wireless/new-jersey-metro (last accessed Jan. 22, 2020) (describing ICE's
laser and millimeter wave route between ICE's Mahwah data center and
the Carteret and Secaucus data centers. The Commission has
instituted proceedings to allow for additional analysis and input
concerning proposed fees in connection with the NYSE Low-Latency SIP
Filing. See Securities Exchange Act Release No. 87699 (Dec. 9,
2019), 84 FR 68239 (Dec. 13, 2019). In addition, the CTA and OPRA
recently made changes that permit access to the NMS feeds with an
expected reduction in latency. ``The NMS Network uses low-latency
network switches and optimized topology to minimize latency, which
[CTA and OPRA] expects will result in one-way latency, across all
network hops, of approximately 5us, including fiber latency. This is
a substantial improvement over the current inbound one-way latency
of approximately 144us over [Secure Financial Transaction
Infrastructure].'' See NMS Network Customer FAQs, at 3 (2019),
available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/NMS_Network_FAQ.pdf (last accessed Jan.
22, 2020); CTA and UTP Annual Letter, supra note 181, at 1 (``In its
continuing effort to reduce latency and improve resiliency, the CTA
will be making two improvements to the CTA/CQ feeds this year.
First, subscribers will be able to connect to a new, dedicated, low
latency NMS network to access CTA/CQ feeds. Subject to SEC approval,
this should be available in the first quarter of 2020. Second, the
CTA will complete its migration to NYSE's new Pillar technology,
which will provide substantial latency reductions for the CTA/CQ
feeds. CTA anticipates that it will launch the new technology in the
summer of 2020.'').
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Over the past several years, market participants have increasingly
raised concerns about these various forms of latency and how they
affect their ability to participate competitively in today's markets
and provide best execution to their customers. Market participants have
argued that as significant investments have been made in the
proprietary data environment, the Equity Data Plans, which are operated
by the SROs, have not made--or have been slow to make--the investments
necessary to address most of these concerns.\411\ As a result, the
latency differentials, in their various forms, between SIP data and
proprietary data are significant enough that market participants
believe they affect their ability to trade competitively and to provide
best execution to customer orders.\412\
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\411\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA, to Mary Jo White, Chair,
Commission, 8-9 (Oct. 24, 2014), available at https://www.sec.gov/comments/s7-02-10/s70210-422.pdf; Letter from John Ramsay, Chief
Market Policy Officer, Investors Exchange LLC, to Vanessa
Countryman, Secretary, Commission (Sept. 24, 2019) (``Ramsay Letter
II'') (attachment to letter), available at https://www.sec.gov/comments/4-729/4729-6190352-192448.pdf; Proposed Governance Order,
supra note 8.
\412\ See, e.g., Roundtable Day One Transcript at 64 (Brad
Katsuyama, IEX) (``[a]nyone who cares or is, you know, making
machine-level decisions cannot use the SIP just from a speed
standpoint . . . [b]ut if full information and speed become
important, which it is for the majority of large players maintaining
their own electronic trading platform, then I would not say the SIP
serves much of a purpose to them.''); at 66 (Mehmet Kinak, T. Rowe
Price (``[t]his is a best execution obligation. We are obligated to
try and produce best execution on every single order that we have.
If our brokers are not aligned in that manner to use the most
direct, the fastest, the most robust feeds they can get their hands
on, then we will trade with someone else.''); T. Rowe Price Letter
at 2 (explaining that broker-dealers must purchase proprietary data
because SIP data is slow and not as expansive as proprietary data
and that even if the Commission provided a safe harbor permitting
broker-dealers to fulfill their best execution requirements by
relying on SIP data, broker-dealers believe that they have an
obligation to obtain the ``more robust, faster'' proprietary data
feeds).
---------------------------------------------------------------------------
Proprietary data products often rely on low latency wireless
connections, and the data is transmitted directly from each exchange to
the data center of the subscriber without first having to travel to a
centralized consolidation location as is the case with the exclusive
SIPs. In addition, new entities have entered the market data space by
providing specialized market data products for subscribers using
proprietary data feeds. In essence, the provision of proprietary data
to market participants via a decentralized consolidation model has
developed in a competitive environment that has enhanced content and
reduced latency for market participants; however, improvements to
latency occurred more slowly and to a lesser extent with the exclusive
SIPs.\413\ The concurrent existence of both the exclusive, centralized
consolidation model for SIP data and the decentralized consolidation
model for enhanced proprietary data has resulted in a two-tiered market
data environment, where those participants that can reasonably afford
and choose to
[[Page 16768]]
pay for the proprietary feeds receive other content rich data faster
than those who do not, such as smaller market participants that face
higher barriers to entry from data and other exchange fees.\414\ The
Commission is concerned about this disparity and its effect on
investors. Accordingly, the Commission is proposing to address the
latency differentials and reduce the asymmetries that exist within this
two-tiered environment.
---------------------------------------------------------------------------
\413\ See supra note 411 and accompanying text.
\414\ See infra note 418.
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B. Proposed Decentralized Consolidation Model
To enhance the speed and quality of the collection, consolidation,
and dissemination of the proposed consolidated market data, the
Commission is proposing a decentralized consolidation model with
competing consolidators \415\ and self-aggregators \416\ to replace the
existing centralized consolidation model which relies on the exclusive
SIPs.\417\
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\415\ See infra Section IV.B.2.
\416\ See infra Section IV.B.3.
\417\ The Commission is taking an incremental approach to
addressing market data infrastructure issues and is at this time
addressing only the market data infrastructure issues of NMS stocks.
The market data needs of options market participants and equities
market participants are different, as are the market structures for
options and equities more broadly. The Commission's proposal to
expand the content of consolidated market data and introduce a
decentralized consolidation model for its distribution to market
participants has been designed for NMS stocks. The Commission may in
the future consider the market data infrastructure of listed
options. See also Proposed Governance Order, supra note 8.
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The Commission preliminarily believes that a decentralized
consolidation model with competing consolidators and self-aggregators
would benefit market participants because it would significantly reduce
the geographic, aggregation, and transmission latency differentials
that exist between SIP data and proprietary data that have increasingly
reduced the utility of SIP data and disadvantaged, in particular,
smaller market participants.\418\ Specifically, as discussed above, the
Commission preliminarily believes that the decentralized consolidation
model would reduce geographic latency by facilitating the ability of
proposed consolidated market data to be delivered to subscribers more
directly, without going to a separate location to be consolidated by
the exclusive SIPs.\419\ In addition, the proposed decentralized
consolidation model likely would reduce geographic latency by allowing
consolidation to occur at the data center where a data end-user is
located instead of occurring only at the CTA/CQ SIP and the Nasdaq UTP
SIP data centers. This arrangement would permit competing consolidators
to receive data from each exchange directly at the point of
consolidation and latency-sensitive data end-users to receive proposed
consolidated market data at the same location if they so desired.\420\
This would eliminate the geographic latency necessarily encountered
when a latency-sensitive data end-user receives consolidated data from
an exclusive SIP that is in a separate data center and that exclusive
SIP is consolidating data from exchanges that are located in other data
centers.
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\418\ See infra Section VI.C.2(c). Roundtable panelists stated
that broker-dealers do not have the option to forgo buying the
proprietary data in meeting their clients' needs because the SIPs
are slower and not as expansive. See Roundtable Day One Transcript
at 65-66 (Mehmet Kinak, T. Rowe Price); T. Rowe Price Letter at 2;
Roundtable Day Two Transcript at 245 (Tyler Gellasch, Healthy
Markets) (asking how a small firm can be competitive when it has to
spend $50,000 per month to connect to one exchange group's
proprietary data feeds), at 280-281 (describing market data as a
mandatory ``tax'' on doing business that imposes a
disproportionately large burden on small brokers). But see Robert P.
Bartlett, III and Justin McCrary, How Rigged Are Stock Markets?
Evidence from Microsecond Timestamps (2017) (``Bartlett and
McCrary''), available at https://www.law.berkeley.edu/wp-content/uploads/2019/10/bartlett_mccrary_latency2017.pdf (``[O]ur analysis
suggests SIP reporting latencies generate remarkably little scope
for exploiting the informational asymmetries available to
subscribers to exchanges' direct data fees.''). Bartlett and
McCrary, however, cautioned that their ``results should not be over-
interpreted'' and noted that their results ``do not rule out other
types of latency arbitrage that might be prevalent in the current
environment.'' Roundtable respondents supported the view that a
competing consolidator model would reduce the speed differential
between current SIP data and proprietary data. See, e.g., Roundtable
Day One Transcript at 49-50 (Prof. Hal Scott, Harvard University);
SIFMA Letter II.
\419\ As noted above, the current Equity Data Plan architecture
requires SRO data to be sent from an SRO's data center to the
exclusive SIP (typically in a separate data center in a different
geographic location) for consolidation, prior to then being
transmitted from the plan processor's data center to market data
users (again, typically in a separate data center in a different
geographic location) once the data is consolidated. See supra notes
395-396 and accompanying text.
\420\ If a competing consolidator chooses not to consolidate
data at the data center of its users, the Commission believes the
users would still benefit from reduced aggregation and transmission
latencies resulting from the proposed decentralized consolidation
model. See infra notes 421-422 and accompanying text.
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In addition, the Commission preliminarily believes that the
introduction of competitive forces will lead to improvements in the use
of more competitive, low latency aggregation and transmission
technologies for consolidated market data. Specifically, competition
should incentivize competing consolidators to minimize the amount of
time it takes to aggregate SRO data into proposed consolidated market
data.\421\ In addition, competition could incentivize competing
consolidators to reduce transmission latency by offering superior
connectivity options that are faster than fiber optics, such as
microwave, laser, or other wireless means of connectivity.\422\
Competing consolidators and self-aggregators would not be restricted to
the transmission methods mandated by the Equity Data Plans \423\ and
would compete based on the efficiency of their aggregation of raw SRO
data to generate proposed consolidated market data. By introducing
competitive forces into the collection, consolidation, and
dissemination of proposed consolidated market data, the Commission
preliminarily believes such data could be delivered to market
participants with improved efficiencies and latencies comparable to
proprietary market data products.
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\421\ The Commission is proposing to require each competing
consolidator to publish on its website its latency statistics on a
monthly basis. See infra Section IV.B.2(e)(ii).
\422\ See infra Section VI.C.2(c).
\423\ As noted above, the NYSE and Nasdaq offer faster wireless
connectivity to their data centers and other data centers. See supra
Section IV.A.
---------------------------------------------------------------------------
To implement this model, the Commission proposes to: (1) Amend Rule
600 to introduce definitions of competing consolidator and self-
aggregator; (2) amend Rule 603(b) to require the SROs to provide their
NMS information to competing consolidators and self-aggregators in the
same manner the SROs make available this information to any person and
to remove the requirement that there be only one plan processor for
each NMS stock; and (3) adopt new Rule 614 to require the registration
of competing consolidators and establish the obligations with which
they must comply and a new Form CC for competing consolidator
registration. In addition, the Commission is proposing to amend
Regulation SCI to expand the definition of ``SCI entities'' to include
competing consolidators because they would be sources of proposed
consolidated market data, and therefore would ``play a significant role
in the U.S. securities markets and/or have the potential to impact
investors, the overall market, or the trading of individual
securities.'' \424\ As discussed below, the Commission preliminarily
believes that if a competing consolidator's consolidated market data
feed became unavailable or otherwise unreliable, it could have a
significant impact on the trading of securities, and could interfere
[[Page 16769]]
with the maintenance of fair and orderly markets.\425\ Accordingly,
this change would subject competing consolidators to the requirements
of Regulation SCI. Under this new proposed decentralized consolidation
model, the SROs would be required to provide their NMS information to
competing consolidators and self-aggregators and the existing exclusive
SIP model would cease.
---------------------------------------------------------------------------
\424\ See Regulation SCI Adopting Release, supra note 28, at
72258.
\425\ See infra Section IV.B.2(f).
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The Commission preliminarily believes that the implementation of a
decentralized consolidation model with competing consolidators and
self-aggregators will fundamentally improve the way consolidated market
data, as proposed, is provided in the U.S. Among other things, this
model should materially reduce information asymmetries for those market
participants who rely exclusively on the exclusive SIP feed and
facilitate the ability to achieve best execution for those broker-
dealers who rely exclusively on the SIP feed. Finally, the Commission
believes that the introduction of competition into the collection,
consolidation, and dissemination of the proposed consolidated market
data should help ensure that such data continues to be provided in an
accurate, reliable, prompt, and fair manner \426\ as the market evolves
in the future.
---------------------------------------------------------------------------
\426\ See 15 U.S.C. 78k-1(c)(1)(B).
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1. Access to Data
The Commission is proposing to amend Rule 603(b) of Regulation NMS
to reflect the decentralized consolidation model by requiring each SRO
to provide its NMS information, including all data necessary to
generate proposed consolidated market data, to all competing
consolidators and self-aggregators \427\ in the same manner and using
the same methods, including all methods of access \428\ and data
formats, as such SRO makes available any information to any other
person.\429\
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\427\ The proposal does not include a requirement that the SROs
provide a standardized format for the data because the Commission
preliminarily believes that imposing a standardized format would
increase costs and burdens on the SROs and that competing
consolidators and self-aggregators would be able to handle data
received in multiple formats, as determined by each SRO, as is the
case today for proprietary data. The Commission is proposing to
require each SRO to offer the same access or transmission options
and the same formats offered for proprietary data to proposed
consolidated market data. See proposed amendment to Rule 603(b).
\428\ For example, the same access options available to
proprietary feeds, including, but not limited to transmission medium
(i.e., fiber optics or wireless), multicast communication,
colocation options, physical port, logical port, bandwidth, and
FPGA, would be required to be made available for proposed
consolidated market data feeds. Further, any enhancements to
proprietary feed methods of access should similarly be made to
consolidated market feeds.
\429\ Four commenters supported this approach. One commenter
stated that for a new consolidator model to be competitive, the
consolidators would have to have the right to buy data from
exchanges on non-discriminatory terms. See Ramsay Letter II
(attachment to letter). Another commenter stated that the economic
terms of co-located competing consolidators at an exchange data
center should be equivalent to those offered to the exchange's
trading members. This commenter also suggested that any exchange
that operates a competing consolidator in its data center should
have policies and procedures to ensure that competing consolidators
in the same data center have equal access to the exchange's feeds at
equal latencies. This commenter also supported the provision of
direct market data feeds by exchanges to competing consolidators.
See Letter to Brent J. Fields, Secretary, Commission, from Melissa
MacGregor, Managing Director and Associate General Counsel, and
Theodore R. Lazo, Managing Director and Associate General Counsel,
SIFMA, dated Oct. 24, 2018 (``SIFMA Letter'') (attachment to
letter). The third commenter stated that all market data
distributors should receive the same market data at the same time
and at the same cost, which may require exchange proprietary data
feeds to be delayed to match the data receipt time of affiliated or
third-party SIPs. The commenter said that exchanges, affiliates, and
third parties then would be able to compete to provide market data
to recipients. See Letter to Jay Clayton, Chairman, Commission, from
Tyler Gellasch, Executive Director, Healthy Markets Association, 3
(Jan. 3, 2020) (``Healthy Markets Association Letter III''). The
fourth commenter suggested that the Commission update its
interpretations for Rule 603(a) to emphasize ``the synchronized
availability of data between SIP and exchanges' proprietary products
to satisfy the fair and reasonable, as well as non-discriminatory
principles.'' See Letter to Vanessa Countryman, Secretary,
Commission, from Kelvin To, Founder and President, Data Boiler
Technologies, LLC, 8 (Dec. 6, 2019) (``Data Boiler Letter''). The
Commission believes that its proposed amendment to Rule 603(b), as
discussed below, would achieve this result by requiring the same
manner and methods, including all methods of access and the same
format for competing consolidators, self-aggregators and subscribers
of proprietary data.
---------------------------------------------------------------------------
Under the Commission's proposed approach, competing consolidators
and self-aggregators would have to collect, and the SROs would provide,
all of each SRO's market data that is necessary to generate
consolidated market data as proposed,\430\ and the competing
consolidators and self-aggregators would aggregate the SROs' market
data to generate the proposed consolidated market data. For exchange
data, an exchange could leverage its existing offerings and
infrastructure and make available to competing consolidators and self-
aggregators its current proprietary data products that contain data
elements that are specified in the proposed definition of consolidated
market data,\431\ or an exchange could develop a new market data
product that contains only the data elements that are specified in the
proposed definition of consolidated market data. Competing
consolidators and self-aggregators could choose to purchase products
that include only the proposed consolidated market data elements or
products that contain elements of both proposed consolidated market
data and other proprietary data. However, all SROs must offer market
data, and access to such data, to those competing consolidators or
self-aggregators that elect to purchase only data that would be
necessary to create consolidated market data, as required under the
proposed rule amendments.
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\430\ One commenter advocated that each exchange provide a
single data feed to market participants. The commenter said that a
single data feed ``would better serve market participants from the
standpoint of equality and fairness.'' See T. Rowe Price Letter at
3. The proposed rule does not require the SROs to provide a single
feed. The Commission preliminarily believes that the SROs should be
able to utilize their current data feeds to make available the data
necessary to generate proposed consolidated market data. This would
reduce the costs and burdens of implementing the proposed amendments
to Rule 603(b).
\431\ For example, an exchange could make available a current
proprietary DOB product that contains elements of proposed core data
to competing consolidators and self-aggregators for purposes of Rule
603(b).
---------------------------------------------------------------------------
The proposed decentralized consolidation model and the proposed
consolidated market data definition do not preclude the exchanges from
continuing to sell proprietary data. If an exchange provided its
proprietary data products to a competing consolidator or self-
aggregator and a competing consolidator or self-aggregator developed a
product, or otherwise used data, that exceeded the scope of proposed
consolidated market data (e.g., full depth of book data), the competing
consolidator or self-aggregator would be charged separately for the
proprietary data use pursuant to the individual exchange fee
schedules.\432\ Self-aggregators and competing consolidators that limit
their use of exchange data to proposed consolidated market data
elements would be charged only for proposed consolidated market data
pursuant to the effective national market system plan(s) fee
schedules.\433\ As noted above, under the proposed decentralized
consolidation model, SROs must make available market data to competing
consolidators or self-aggregators that elect only to purchase
[[Page 16770]]
data necessary for the proposed consolidated market data.\434\
---------------------------------------------------------------------------
\432\ Fees for market data that is outside of the proposed
definition of consolidated market data (i.e., proprietary data
products, and access to such proprietary data products) would be
subject to the rule filing process pursuant to Section 19(b) and
Rule 19b-4. As discussed above, competing consolidators would be
able to develop products for their subscribers based on subscriber
demand. See supra notes 322-323 and accompanying text.
\433\ Fees for proposed consolidated market data would be
subject to the NMS plan process pursuant to Rule 608 of Regulation
NMS. See infra Section IV.B.4 for a discussion of the effective
national market system plan(s).
\434\ Vendors would still be able to operate in the
decentralized consolidation model. Vendors would be able to receive
proprietary market data directly from the SROs as they do today or
they would be able to receive consolidated market data from a
competing consolidator in a manner that is similar to how they
receive SIP data today without being required to register as a
competing consolidator. However, if a vendor wished to receive
directly from the SROs information with respect to quotations for
and transactions in NMS stocks at the prices established by the
effective national market system plan(s) and generate consolidated
market data for dissemination, such vendor would be required to
register as a competing consolidator. Thus, only competing
consolidators and self-aggregators would be able to directly receive
the NMS information that is necessary to generate consolidated
market data from the SROs at the prices established by the effective
national market system plan(s). Id.
---------------------------------------------------------------------------
Currently, the exclusive SIPs are subject to Exchange Act Section
11A(c)(1)(C) (as implemented by Rule 603(a)(1)), which requires that
exclusive processors (which include the exclusive SIPs and SROs when
they distribute their own data) must assure that all securities
information processors may obtain on fair and reasonable terms
information with respect to quotations for and transactions in
securities, which includes consolidated market data.\435\ Section
11A(c)(1)(D), in turn (as implemented by Rule 603(a)(2)), requires that
the SROs provide such data to broker-dealers and others on terms that
are not unreasonably discriminatory. As we have noted, competing
consolidators will be securities information processors and thus
Exchange Act Section 11(A)(c)(1)(C) will continue to apply. Similarly,
self-aggregators are broker-dealers and thus Exchange Act Section
11A(c)(1)(D) will continue to apply.
---------------------------------------------------------------------------
\435\ 15 U.S.C. 78k-1(c). See also Rule 603(a)(1)-(2) of
Regulation NMS, 17 CFR 242.603(a)(1)-(2).
---------------------------------------------------------------------------
The Commission seeks to ensure that consolidated market data is
widely available for reasonable fees.\436\ In discharging its
statutorily mandated review function, the Commission must assess the
proposed fees and determine whether they are fair and reasonable, and
not unreasonably discriminatory.\437\ The Commission must have
``sufficient information before it to satisfy its statutorily mandated
review function''--that the fees meet the statutory standard.\438\ The
Commission has previously stated that fees for consolidated SIP data
can be shown to be fair and reasonable if they are reasonably related
to costs.\439\
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\436\ Bloomberg Decision, supra note 37, at 4, n.12 (citing
Regulation NMS Adopting Release, supra note 10, at 37560) (``In the
Proposing Release, the Commission emphasized that one of its primary
goals with respect to market data is to assure reasonable fees that
promote the wide public availability of consolidated market
data.'').
\437\ See 15 U.S.C. 78k-1(c); see also Rules 603(a)(1)-(2), 608
of Regulation NMS, 17 CFR 242.603(a)(1)-(2), 608; Bloomberg
Decision, supra note 37, at 11-12.
\438\ Bloomberg Decision, supra note 37 at 15; cf. Rule of
Practice 700, 17 CFR 201.700 (providing that the burden of
demonstrating that a proposed rule change satisfies statutory
standards is on the self-regulatory organization that proposed the
rule change).
\439\ In the Market Information Concept Release, the Commission
stated ``the fees charged by a monopolistic provider (such as the
exclusive processors of market information) need to be tied to some
type of cost-based standard in order to preclude excessive profits
if fees are too high or underfunding or subsidization if fees are
too low. The Commission therefore believes that the total amount of
market information revenues should remain reasonably related to the
cost of market information.'' See Market Information Concept
Release, supra note 11, at 70627. The Commission later explained
that because core data must be purchased, their fees are less
sensitive to competitive forces. See Securities Exchange Act Release
No. 59039 (Dec. 2, 2008), 73 FR 74770, 74782 (Dec. 9, 2008) (File
No. SR-NYSEArca-2006-21). A reasonable relation to costs has since
been the principal method discussed by the Commission for assessing
the fairness and reasonableness of such fees for core data, with the
recognition that ``[t]his does not preclude the Commission from
considering in the future the appropriateness of another guideline
to assess the fairness and reasonableness of core data fees in a
manner consistent with the Exchange Act.'' See Bloomberg Decision
supra note 37, at 15 & nn.63. Although this proposal introduces
competition into the dissemination of consolidated market data, the
mandatory nature of the provision of consolidated market data by the
SROs has not changed. The ``principal method we have discussed for
assessing the fairness and reasonableness of core data fees has
stated that core data fees should bear at least some relationship to
costs; past Commission statements have contemplated various
approaches for how that relationship might be assessed. This is
because distributors of core data have an effective monopoly over
such data, and accordingly competitive market forces are not
operating to impose sufficient constraints to promote core data
fees' fairness and reasonableness.'' See Bloomberg Decision, supra
note 37, at 15 (footnotes and citations omitted).
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The exchanges would be able to offer different access options
(e.g., with different latencies, throughput capacities, and data-feed
protocols) to market data customers, but any access options available
to proprietary data customers must also be available to competing
consolidators and self-aggregators for the purpose of collecting and
consolidating proposed consolidated market data.\440\ Proposed Rule
603(b) would require exchanges to provide all forms of access used for
proprietary data to all competing consolidators and self-aggregators
for the collection of the data necessary to generate proposed
consolidated market data. The Commission is proposing to require that
an exchange offer the same form of access, such as fiber optics,
wireless, or other forms, in the same manner and using the same
methods, including all methods of access and the same format, as the
exchange offers for its proprietary data. For instance, if an exchange
has more than one form of transmission for its proprietary data, then
the exchange must offer the competing consolidators and self-
aggregators those types of transmission for proposed consolidated
market data. The proposed rule would not require an exchange to offer
new forms of access, but if an exchange did offer any new forms of
access for proprietary data, it would have to offer them for proposed
consolidated market data as well. Different forms of access affect the
delivery of data. For example, as discussed above, fiber connections
have latencies that wireless connections do not. If an exchange
provided its proprietary market data via wireless connections and
proposed consolidated market data only via fiber connections, the
latencies that exist today would continue. Accordingly, the Commission
preliminarily believes that the SROs should be required to provide
proposed consolidated market data in the same manner and using the same
methods, including all methods of access and the same format as they
provide for proprietary data.
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\440\ See Rule 603(a) of Regulation NMS, 17 CFR 242.603(a).
Access fees would be set forth in each individual SRO's fee
schedules.
---------------------------------------------------------------------------
The Commission understands that different market participants have
different access needs. The Commission is not mandating a specific
connectivity option or limiting options for market participants but
believes that all connectivity options, including co-location, must be
available to all market participants whether they are purchasing
proposed consolidated market data or proprietary data. In addition, the
access requirement under Rule 603(b) would require that the exchanges
provide their NMS information, including all data necessary to generate
consolidated market data, at one data dissemination location co-located
near each exchange's matching engine. This requirement would allow
competing consolidators and self-aggregators to receive data at that
location at the same speeds, and with the same access options, as the
exchange offers its market data. Different colocation options within a
data center could raise concerns about whether that exchange is
providing the same manner of access to its data as proposed to be
required under Rule 603(b). Further, the exchanges would not be
permitted to provide their NMS information necessary to generate
consolidated market data in a faster manner to any affiliate exchange,
a subsidiary or other affiliate that operates
[[Page 16771]]
as a competing consolidator or a subsidiary or affiliate that competes
in the provision of proprietary data.
Furthermore, proposed Rule 603(b) would require that all access
options be provided in a latency-neutralized manner such that all
participants within the exchange's data center--such as proprietary
data subscribers, competing consolidators, and self-aggregators--would
receive the data at the same time, regardless of their location or
status within the data center.\441\ For example, exchanges could adopt
equal cable length protocols (i.e., where cable lengths from network
equipment to customer cabinets are harmonized for equal access) to
ensure that all of the exchange's data center connections provide
market data simultaneously. The proposed decentralized consolidation
approach would require the SROs to use the same latency-neutralization
processes for competing consolidators and self-aggregators as they
offer to subscribers of proprietary data.
---------------------------------------------------------------------------
\441\ See also Rule 603(a) of Regulation NMS, 17 CFR 242.603(a);
supra note 440 and accompanying text.
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The Commission is also proposing to remove the requirement in Rule
603(b) that ``all consolidated information for an individual NMS stock
[be disseminated] through a single plan processor.'' \442\ While this
requirement is necessary for the centralized consolidation model, it
would be inconsistent with the proposed decentralized consolidation
model, which would allow multiple competing consolidators to
disseminate proposed consolidated market data in individual NMS stocks
and would permit self-aggregators to collect and generate proposed
consolidated market data for individual NMS stocks for their own
internal uses.
---------------------------------------------------------------------------
\442\ 17 CFR 242.603(b).
---------------------------------------------------------------------------
The Commission preliminarily believes that the proposed amendments
to Rule 603(b) would be consistent with the goals of Section 11A of the
Exchange Act by helping to ensure the prompt, accurate, reliable, and
fair collection, processing, distribution, and publication of NMS
information, as well as the fairness and usefulness of such data.\443\
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\443\ See Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C.
78k-1(c)(1)(B). Section 11A(c)(1)(B) of the Exchange Act authorizes
the Commission to prescribe rules, as necessary or appropriate in
the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Exchange Act, that assure the
prompt, accurate, reliable, and fair collection, processing,
distribution, and publication of quotation and transaction
information, as well as the fairness and usefulness of the form and
content of such data. Id.
---------------------------------------------------------------------------
The Commission requests comment on the proposed amendments to Rule
603(b) of Regulation NMS. In particular the Commission solicits comment
on the following:
64. Should the SROs be required to provide all of their market data
with respect to NMS stocks to competing consolidators and self-
aggregators? Should the SROs charge fees based on the use of the data,
e.g., fees for proposed consolidated market data set by the effective
national market system plan(s) and fees for proprietary data set by
individual SROs? Should the SROs only be required to provide the market
data that is necessary to generate and calculate proposed consolidated
market data? Or, should the determination as to how best to provide the
market data that is necessary to generate and calculate proposed
consolidated market data be left to the discretion of SROs? What are
the benefits and costs of each of these potential approaches?
65. Should the SROs be required to offer both proposed consolidated
market data and proprietary data to competing consolidators from the
same platform and using the same technology infrastructure at an
exchange data center for both products?
66. Should the SROs be required to offer both proposed consolidated
market data and proprietary data to competing consolidators from the
same platform and using the same SRO infrastructure where the pricing
model for the different products is based on data use as opposed to
being based upon distinct data feeds?
67. Should the SROs be permitted to process their market data
before providing it to competing consolidators and self-aggregators?
For example, should the SROs be permitted to aggregate odd-lots before
providing data to competing consolidators and self-aggregators? If so,
why and to what extent? Should such processing only be allowed to the
extent that it does not result in any latency differential between
processed and unprocessed data? Alternatively, should such processing
be required to facilitate ease of use for certain customers?
68. Should exchanges be required to permit co-location of competing
consolidators and self-aggregators within their data centers? If so,
should the fees charged for such colocation be subject to the effective
national market system plan(s) for NMS stocks?
69. Should all data disseminated by the SROs to competing
consolidators and self-aggregators be in the same format (e.g.,
aggregated vs. message-by-message depth of book)? Please explain the
expected benefits and costs of allowing for multiple formats for data
dissemination.
70. Should the SROs make historical data freely available to market
participants at a specified location and in a specified format? Why or
why not?
71. Is there anything different about having competing
consolidators or changing the content of consolidated market data that
should affect the analysis of the fairness and reasonableness of fees
for data distributed pursuant to an NMS plan, or how the NMS plan
participants demonstrate the fairness and reasonableness of those fees?
If so, please explain why.
72. Do commenters believe that the Commission should also require
the SROs to provide a connectivity option solely for access to the NMS
information necessary to generate proposed consolidated market data?
2. Competing Consolidators
As noted above, currently Rule 603(b) requires all consolidated
information for an individual NMS stock to be disseminated through a
single plan processor.\444\ While the Commission has issued a proposed
order that would direct the SROs to develop a single ``New Consolidated
Data Plan'' with a new governance structure,\445\ the Commission now
proposes to update and modernize the manner in which NMS information is
collected, consolidated, and disseminated. The Commission is proposing
to amend Regulation NMS to introduce competitive forces as one of
several means to update and modernize the provision of proposed
consolidated market data. Competing consolidators would replace the
existing exclusive SIPs and would collect NMS information from each of
the SROs.\446\ Thereafter, competing consolidators would calculate,
consolidate, and disseminate the data as consolidated market data, as
proposed to be defined.\447\ The Commission
[[Page 16772]]
preliminarily believes that the proposed amendments to Regulation NMS
to introduce competing consolidators should help to ensure the
``prompt, accurate, reliable, and fair collection, processing,
distribution, and publication of information with respect to quotations
for and transactions in such securities and the fairness and usefulness
of the form and content of such information.'' \448\ Further, the
Commission preliminarily believes that these new market data providers
could help to effectively address the latency concerns related to the
exclusive SIPs, as well as the cost concerns that have been raised
regarding the need to buy both SIP data from the Equity Data Plans as
well as proprietary data from the exchanges, and add resilience to the
collection, consolidation and distribution of consolidated market data
by having redundant systems perform these functions rather than an
exclusive SIP.
---------------------------------------------------------------------------
\444\ Rule 603(b) of Regulation NMS, 17 CFR 242.603(b). See also
supra Section II.B.
\445\ See Proposed Governance Order, supra note 8.
\446\ The existing exclusive SIPs would be required to continue
their operations until such time as the Commission considers and
approves an NMS plan amendment that would effectuate a cessation of
their operations. See infra Section IV.B.6. Should the existing
exclusive SIPs choose to become competing consolidators, proposed
Rule 614(a) mandates a registration process for securities
information processors that wish to become competing consolidators.
See infra Section IV.B.2(e). If the existing exclusive SIPs choose
to cease operations, the SROs would be required to amend the
effective national market system plan(s) for NMS stocks to reflect
this change.
\447\ As discussed in Section IV.B.2(f), infra, because
competing consolidators would be the sources of proposed
consolidated market data, the Commission is proposing to define them
as ``SCI entities,'' and thus subject to the requirements of
Regulation SCI. The Commission proposes to amend Rule 1000 of
Regulation SCI to effect this change. See proposed amendment to Rule
1000 of Regulation SCI. See also 17 CFR 242.1000.
\448\ 15 U.S.C 78k-1(c)(1)(B).
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(a) Previous Consideration of Competing Consolidators Under Regulation
NMS
The Commission previously considered introducing competitive forces
to the dissemination of SIP data when it proposed and adopted
Regulation NMS. Specifically, the Commission discussed a competing
consolidator model \449\ that, as described, would have retained the
consolidated display requirement of the predecessor to Rule 603(c) of
Regulation NMS but would have eliminated the Equity Data Plans and the
two exclusive SIPs.\450\ Under the competing consolidator model that
was being considered, each SRO would be allowed to establish its own
fees, enter into and administer its own market data contracts, and
provide its own data distribution facility.\451\ Competing
consolidators would purchase data from the individual SROs, consolidate
it, and distribute it to investors and other data users.\452\
---------------------------------------------------------------------------
\449\ The competing consolidator model was recommended by the
Advisory Committee on Market Information (``Advisory Committee on
Market Information''), which had been formed to consider market data
issues. See Report of the Advisory Committee on Market Information:
A Blueprint for Responsible Change (Sept. 14, 2001), available at
https://www.sec.gov/divisions/marketreg/marketinfo/finalreport.htm.
\450\ See Securities Exchange Act Release No. 49325 (Feb. 26,
2004), 69 FR 11126 (Mar. 9, 2004) (``Regulation NMS Proposing
Release''), at 11177-11178; Regulation NMS Adopting Release, supra
note 10, at 37558-37559.
\451\ See Regulation NMS Proposing Release, supra note 450, at
11177; Regulation NMS Adopting Release, supra note 10, at 37559.
\452\ Id.
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At that time, however, the Commission noted several drawbacks to
that competing consolidator model,\453\ including: (1) A lack of
uniform data distribution to the public, (2) the potential for an
increase in processing costs due to multiple consolidators performing
tasks previously performed by a single processor, and (3) the risk that
the fees for core data, as then contemplated, could increase because
payment of every SRO's fees would be mandatory, thereby affording
little room for competitive forces to influence the level of fees.\454\
---------------------------------------------------------------------------
\453\ See Regulation NMS Proposing Release, supra note 450, at
11178.
\454\ Id. The Commission stated that it would have to review
every SRO's market data fees and get involved in multiple market
data fee disputes.
---------------------------------------------------------------------------
When addressing its concerns about a potential loss of data
uniformity, the Commission explained that a report issued by the
Advisory Committee on Market Information, which prompted consideration
of a competing consolidator model in the Regulation NMS Proposing and
Adopting Releases,\455\ noted four types of quality problems that could
arise from the competing consolidator model relating to: (1) Sequencing
of information, (2) validation tolerances, (3) capacity, and (4) data
protocols and formats.\456\ With respect to information sequencing, the
report stated that the competing consolidator model would impose a risk
that market data messages would be processed in different sequences by
different consolidators due to the use of differing hardware, software,
or communications platforms to process market data. On validation
tolerances, the report stated that standards would need to be
established for competing consolidators to verify the consistency of
information (such as the NBBO), since the plan processors currently
check all market center messages to verify that they utilize correct
message structures. The report stated that competing consolidators must
have sufficient capacity (for example, specifying network capacity,
input, output line, system, internal system threading, storage and
memory capacity, and database size) to process the information from all
reporting market centers, explaining that if capacity is lacking,
messages will be delayed to data recipients. Finally, with respect to
data protocols and formats, the report said that the use of different
protocols, message formats, and technologies by different consolidators
could make the market data system more cumbersome and prone to error.
The report noted that exclusive SIPs currently receive market center
information using standard input formats and disseminate consolidated
data using standard output formats.\457\
---------------------------------------------------------------------------
\455\ See supra notes 449-450.
\456\ See supra note 449. See infra text accompanying notes 503-
509, 513-515 for a discussion of the risks. The Advisory Committee
on Market Information report stated that these risks would be
manageable and recommended allowing the private sector to establish
technical standards for competing consolidators rather than the
Commission. See supra note 449, at Section VII.C.2.b(iv).
\457\ See supra note 449, at Section VII.C.2.b.
---------------------------------------------------------------------------
Ultimately, the Commission concluded that investors and other data
users would bear the most risk in switching to a competing consolidator
model, while the SROs would benefit by being able to charge higher fees
for lower quality information; \458\ therefore, the Commission decided
not to propose the competing consolidator model for adoption.\459\
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\458\ The Commission stated that the four types of data quality
problems identified by the Advisory Committee could be limited in
severity, but remained concerned that the introduction of competing
consolidators would compromise data quality. See Regulation NMS
Proposing Release, supra note 450, at 11178.
\459\ See Regulation NMS Proposing Release, supra note 450, at
11178. In the Regulation NMS Adopting Release, the Commission
questioned the extent to which market data fees, which would be
charged per SRO, would be subject to competition. See Regulation NMS
Adopting Release, supra note 10, at 37559.
---------------------------------------------------------------------------
In the Regulation NMS Adopting Release, the Commission focused its
discussion on the extent to which the competing consolidator model
would subject the level of market data fees to competitive forces.\460\
The Commission stated that market participants would need to purchase
data from the SROs and expressed concern that ``the overall level of
fees would not be reduced unless one or more of the SROs or Nasdaq was
willing to accept a significantly lower amount of revenue than they are
currently allocated by the Plans.'' \461\ The Commission believed that
it was ``unlikely that any SRO or Nasdaq would voluntarily propose to
lower just its own fees.'' Rather, the Commission stated that some
SROs, ``particularly those with dominant market shares whose
information is most vital to investors,'' might propose higher fees to
increase their revenues.\462\
---------------------------------------------------------------------------
\460\ Id. While the Commission did not propose a competing
consolidator model, it received comments on the model described in
the Regulation NMS Proposing Release.
\461\ Id.
\462\ Id.
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[[Page 16773]]
(b) Comments and Roundtable Discussion
The current market data infrastructure, with the Equity Data Plans
providing SIP data and the exchanges providing proprietary data
products, has led some market participants to suggest that a competing
consolidator model be considered again as a means to address the
latency and cost differentials that exist between the two data
categories.\463\
---------------------------------------------------------------------------
\463\ The Treasury Capital Markets Report (``Treasury Report''),
which was published one year prior to the Roundtable and referenced
by Roundtable respondents, recommended that the Commission amend
Regulation NMS to permit competing consolidators as alternatives to
the exclusive SIPs as a means to provide faster consolidation and
distribution of a wider breadth of market data, at a lower cost than
provided by the exclusive SIPs. The Treasury Report suggested that
competing consolidators be allowed to purchase proprietary data
feeds from exchanges on a non-discriminatory basis. See U.S.
Department of the Treasury, A Financial System that Creates Economic
Opportunities--Capital Markets, 64 (Oct. 2, 2017). Other
alternatives to the current centralized consolidation model are
discussed below. See infra Section IV.C.
---------------------------------------------------------------------------
Several panelists and commenters at the Roundtable discussed a
competing consolidator model. One panelist presented a competing
consolidator model and noted that it would introduce competition in the
provision of market data by allowing competing consolidators to compete
against each other for subscribers.\464\ This panelist also stated that
market forces would drive consolidators' ``micro-decisions'' regarding
the technology that they would use to provide data.\465\ The panelist
also suggested that competing consolidators should be ``authorized''
and be Regulation SCI-compliant.\466\ The panelist expressed confidence
that a competitive market would produce a more reliable solution than
the current centralized consolidation model.\467\
---------------------------------------------------------------------------
\464\ See Roundtable Day Two Transcript at 25 (Paul O'Donnell,
Morgan Stanley).
\465\ Id. at 26.
\466\ Id. at 25.
\467\ Id.
---------------------------------------------------------------------------
One panelist explained that the exclusive SIPs represent a single
point of failure for the equity markets and that competing
consolidators could improve the speed and quality of SIP data while
also reducing their costs.\468\ Another panelist said that his clients
have expressed interest in competitive SIPs.\469\ One panelist
suggested a competing consolidator model wherein entities would
consolidate messages from individual exchange members. The panelist
acknowledged that this approach would likely result in latency issues,
but suggested that such a consolidated feed could possibly be leveraged
from work being done on reporting to the consolidated audit trail.\470\
---------------------------------------------------------------------------
\468\ See Roundtable Day One Transcript at 49-50 (Prof. Hal
Scott, Harvard University). This panelist also suggested that the
SIPs should include proprietary data and also permit competing
consolidators to do the same.
\469\ See Roundtable Day Two Transcript at 43 (Jarred Yuster,
PICO).
\470\ See Roundtable Day One Transcript at 182-184 (Michael
Friedman, Trillium Trading).
---------------------------------------------------------------------------
Several comment letters submitted in connection with the Roundtable
expressed support for a competing consolidator model.\471\ One
commenter stressed the importance to investors of competition by
stating that competition would result in the reduction of the latency
differential between the exclusive SIPs and proprietary data feeds,
resilience through the use of multiple consolidators, and lower market
data costs.\472\ Another commenter stated that competing consolidators
would compete on ``speed, reliability, and price to the benefit of
traders and investors alike'' \473\ and that competing consolidators
would provide ``the benefit of expanded access to high-quality, low-
cost market data.'' \474\ Another commenter noted the Treasury Report,
which was published in 2017,\475\ recommended that the Commission
recognize that markets for SIP data and proprietary data feeds are not
fully competitive and consider amending Regulation NMS to enable
competing consolidators as an alternative to the exclusive SIPs.\476\
This commenter recommended that if competing consolidators are
permitted, regulators should examine why a broker-dealer chooses a
particular consolidator over others and should monitor how much
exchanges decide to charge consolidators for market data.\477\
---------------------------------------------------------------------------
\471\ See T. Rowe Price Letter, Letter to Brent J. Fields,
Secretary, Commission, from Marcy Pike, SVP, Enterprise
Infrastructure, and Krista Ryan, VP, Associate General Counsel,
Fidelity Investments (Oct. 26, 2018) (``Fidelity Letter''); SIFMA
Letter; SIFMA Letter II; Ramsay Letter II.
\472\ See SIFMA Letter II at 3. In addition to the use of
competing consolidators, this commenter suggested that the
Commission require the exclusive SIPs to compete with each other.
See also T. Rowe Price Letter at 3. This commenter believed that
competition among organizations eligible to serve as exclusive SIPs,
either through a periodic bidding process or the ability of multiple
firms to simultaneously serve as exclusive SIPs and compete to
provide the best overall combination of fees, services, and
reliability would be beneficial.
\473\ See Ramsay Letter II; Fidelity Letter at 10 (noting that
competition may reduce the cost of consolidated market data).
\474\ See Ramsay Letter II.
\475\ See supra note 463.
\476\ See Fidelity Letter at 10.
\477\ Id.
---------------------------------------------------------------------------
Several commenters suggested details on the types of entities that
could be competing consolidators and the functions they could
perform.\478\ For example, one commenter suggested that a competing
consolidator could be any commercial entity meeting minimum standards,
which may include exchanges or other financial technology vendors,\479\
and another suggested that they could be private companies that, unlike
the existing exclusive SIPs, could operate in any location and would
obtain and sell data comparable to proprietary data feeds.\480\ One
commenter suggested a list of functionality that competing
consolidators could provide, such as direct exchange feed data from all
tapes, quote and trade feeds, regulatory messages, and the market
status of all contributing markets.\481\
---------------------------------------------------------------------------
\478\ See SIFMA Letter; Ramsay Letter II.
\479\ See SIFMA Letter.
\480\ See Ramsay Letter II.
\481\ See SIFMA Letter (attachment to the letter). This
commenter also stated that depth of book should be considered but
stated that it should possibly be sold separately.
---------------------------------------------------------------------------
Several panelists, in particular representatives of exchanges
operating the current exclusive SIPs, expressed concern with a
competing consolidator model. One panelist suggested that the interest
in competing consolidators arises from a perception that competing
consolidators will make market data less costly.\482\ The panelist said
that the cost to produce market data is not a competing consolidator's
cost and that this realization may make such a model less attractive to
potential users of competing consolidators.\483\ Another panelist said
that a competing consolidator model could result in multiple NBBOs
prevailing at the same nanosecond, which would provide a broker with a
choice regarding the price at which it filled a customer's order.\484\
The panelist believed that this discretion in choosing an NBBO could
result in uncertainty regarding whether the broker had executed a
customer's order at a price that was in the customer's interest or the
broker's own interest.\485\ One panelist stated that there is value in
understanding what the NBBO is when there are competing SIPs and asked
whether this model would introduce benchmark reference price
arbitrage.\486\ The panelist suggested that
[[Page 16774]]
a conflict could arise if a broker-dealer executes customer orders and
also manages the price against which such trades are benchmarked, i.e.,
by calculating the NBBO.\487\
---------------------------------------------------------------------------
\482\ See Roundtable Day Two Transcript at 46-47 (Michael
Blaugrund, NYSE).
\483\ Id.
\484\ See Roundtable Day Two Transcript at 61 (Prof. Robert
Bartlett, U.C. Berkeley).
\485\ Id.
\486\ See Roundtable Day One Transcript at 151-152 (Oliver
Albers, Nasdaq); Bartlett and McCrary, supra note 418 (examining the
incidence of exclusive SIP latency arbitrage strategies using
timestamp data from the two SIPs and concluding that trading
surrounding exclusive SIP priced trades showed little evidence that
fast traders initiate liquidity taking orders to pick off stale
quotes).
\487\ See Roundtable Day One Transcript at 151-152 (Oliver
Albers, Nasdaq).
---------------------------------------------------------------------------
Several comment letters expressed skepticism about the benefits of
a competing consolidator model. One commenter said that making radical
market structure changes could undermine the NBBO and that adding
multiple competing SIPs would create operational, legal, and regulatory
complexities as well as unintended consequences, and may not solve
concerns about geographic latency.\488\ Further, this commenter
advocated that having a single source of best quote and trade data
creates confidence in the U.S. markets because investors can be assured
that orders will automatically route to the venue with the best quoted
price on the exclusive SIP feed.\489\
---------------------------------------------------------------------------
\488\ See Wittman Letter at 14; Letter to Brent J. Fields,
Secretary, Commission, from Oliver Albers, SVP, Head of Global
Partnerships, Nasdaq, 3 (Oct. 24, 2018) (``Albers Letter'');
Blaugrund Letter at 2. The Wittman and Albers Letters were submitted
on behalf of Nasdaq. The Blaugrund Letter was submitted on behalf of
NYSE.
\489\ See Albers Letter at 3.
---------------------------------------------------------------------------
One commenter said that competition would result in multiple NBBOs
that would confuse the market. Further, the commenter stated that
competition would not ``curb rent-seeking behaviors, nor promote
fairness.'' \490\ This commenter suggested that the Commission mandate
a type of encryption instead of introducing competition, explaining
that encrypting market data would allow proprietary and exclusive SIP
feeds to be made available ``securely in synchronized time.'' \491\
---------------------------------------------------------------------------
\490\ See Data Boiler Letter at 4. This commenter also suggested
that the Commission amend interpretations of Rule 603(a) of
Regulation NMS to emphasize ``synchronized availability of data
between SIP and exchanges' proprietary products.'' Id. at 8.
\491\ Id. at 2, 8.
---------------------------------------------------------------------------
Another commenter urged the Commission to do a cost benefit
analysis of efforts to decentralize the exclusive SIP architecture and
recommended introducing additional instances of existing technology
(i.e., a distributed SIP model) as the best approach to reducing
geographic latency.\492\ This commenter added that a competing
consolidator approach would create complexity that would undermine the
purposes of Regulation NMS to keep costs low for investors.\493\
---------------------------------------------------------------------------
\492\ See NYSE Group Letter at 6; Blaugrund Letter at 4. The
Blaugrund Letter was submitted on behalf of NYSE.
\493\ See Blaugrund Letter at 2.
---------------------------------------------------------------------------
Finally, one commenter opined that competing SIPs would not solve
the problem of the exchanges' control over market data access.\494\
This commenter asked why a technology firm would become a competing SIP
when it cannot control the cost of the market data it must
purchase.\495\
---------------------------------------------------------------------------
\494\ See Healthy Markets Association Letter I at 38.
\495\ Id.
---------------------------------------------------------------------------
(c) Commission Discussion
The Commission is proposing a decentralized consolidation model
with competing consolidators and self-aggregators who would collect
data from the SROs, and calculate, consolidate, and disseminate
proposed consolidated market data to investors and market
participants.\496\ As discussed below, the Commission preliminarily
believes that competing consolidators should be required to disclose
publicly certain information about their organization, operations, and
products, as well as regularly publish certain performance statistics
on, for example, capacity, system availability, and latency to
demonstrate their operational capability and to provide transparency
into the performance of their systems.\497\ In addition, the Commission
preliminarily believes that competing consolidators should have written
policies and procedures to assure the prompt, accurate, and reliable
delivery of consolidated market data.
---------------------------------------------------------------------------
\496\ See infra Section IV.B.2(e)(ii) for a discussion of
proposed Rule 614, which would require competing consolidators that
are SIPs to register with the Commission and comply with specified
responsibilities.
\497\ One Roundtable respondent supported publication of
operational capabilities and performance metrics by competing
consolidators. See SIFMA Letter (attachment to letter).
---------------------------------------------------------------------------
The Commission preliminarily believes that the competing
consolidator proposal would reduce latency, bolster the resilience of
the market data infrastructure, and permit the market data
infrastructure to more readily adapt to changes in technology to better
fit the needs of market participants. The Commission also preliminarily
believes that market forces could help to ensure that the proposed
consolidated market data is reliable, accurate, and prompt. To attract
and maintain its subscriber base, a competing consolidator would have
to ensure that it provides consolidated market data, as proposed, with
minimal latency, but also reliably and accurately, and in a cost-
effective manner. A competing consolidator that does not adequately
perform would risk losing customers to another competing consolidator.
Competition should also incentivize competing consolidators to evolve
and adapt to the needs of the marketplace. If a new technology would
result in better provision of data, a competing consolidator likely
would adopt that technology to expand its client base. Finally, the
introduction of multiple competing consolidators may bring additional
resilience to the collection, consolidation, and distribution of
consolidated market data, as there would be redundant systems
performing these functions rather than one exclusive SIP creating a
single point of failure.\498\
---------------------------------------------------------------------------
\498\ The single point of failure problem was most recently
evidenced on August 12, 2019, when the CTA/CQ SIP experienced
multiple system issues and was unable to effectively fail over to
its backup system. Among other impacts, final closing prices for
many symbols were not able to be published by the CTA until after
8:00 p.m. See CTA, CTA Processing Issue on August 12, 2019: CTA
Participant Trade Files--Revised Notice, Alert (Aug. 28, 2019),
available at https://www.ctaplan.com/alerts#110000144324. Several
Roundtable respondents noted the additional reliability through the
redundancy that multiple consolidators would provide. See Roundtable
Day One Transcript at 49-50 (Prof. Hal Scott, Harvard University);
Roundtable Day Two Transcript at 77 (Paul O'Donnell, Morgan
Stanley); Ramsay Letter II.
---------------------------------------------------------------------------
In proposing this competing consolidator model, the Commission
considered the concerns it described when it previously evaluated a
different competing consolidator model in connection with the adoption
of Regulation NMS.\499\ The Commission preliminarily believes that the
proposed competing consolidator model should not raise the same
concerns due to the differences between the two models and the manner
in which market participants handle market data today.
---------------------------------------------------------------------------
\499\ See supra notes 453-454.
---------------------------------------------------------------------------
First, to address the Commission's prior concern about a lack of
data uniformity resulting from the use of multiple competing
consolidators,\500\ the Commission is proposing requirements governing
how consolidated market data is collected, calculated, generated, and
made available.\501\ The Commission acknowledges that the introduction
of multiple entities generating consolidated market data would result
in multiple versions of consolidated market data. However, market
participants currently consolidate proprietary data feeds, generate
their own consolidated data, and calculate their own NBBO.\502\ The
proposal
[[Page 16775]]
would require competing consolidators and self-aggregators to calculate
consolidated market data, including the NBBO, in a consistent manner as
set forth in the proposed definitions in Rule 600 of Regulation NMS,
which the Commission preliminarily believes would help ensure
continuity and consistency in how proposed consolidated market data,
including the NBBO, is calculated.
---------------------------------------------------------------------------
\500\ See supra note 453.
\501\ See proposed Rules 614(d)(1)-(3).
\502\ See Roundtable Day One Transcript at 128 (Mark Skalabrin,
Redline Trading Solutions) (explaining that his firm builds an NBBO
for its customers that use proprietary data feeds), at 141
(``[E]ffectively today, people have to form the NBBO at their own
location. Even a dark pool does that that's just trying to match at
the best bid and offer. If they use the SIP NBBO, their customers
would be subject to latency harm, because it's too old to use at
their location after it's merged to really get effective
performance.''). Although the Commission does not know the exact
number of market participants that currently consolidate proprietary
data feeds, generate their own consolidated data, and calculate
their own NBBO, Nasdaq has stated that approximately 100 firms
purchase all depth of book data from every exchange. See In the
Matter of the Application of SIFMA, supra note 37, at 29 (citing an
assertion from Nasdaq that 100 firms purchase all depth of book data
from every exchange). The Commission acknowledges that not all of
these market participants consolidate the proprietary data feeds and
solicits comment on the number of market participants that do.
---------------------------------------------------------------------------
Further, on the Advisory Committee on Market Information's
validation tolerance concerns from 2001,\503\ the report had stated
that standards should be created to ensure the consistency of
information, such as the NBBO and market center message
formatting.\504\ The report also stated that differences in the
protocols and formats used by competing consolidators could make the
market data system cumbersome or prone to error.\505\ As noted above,
the proposal would require competing consolidators and self-aggregators
to calculate consolidated market data, including the NBBO, in a
consistent manner in accordance with the proposed definitions in Rule
600 of Regulation NMS. Further, the Commission preliminarily believes
that competing consolidators would likely establish their own standards
for verifying information for consistency because they would be the
entities responsible, pursuant to proposed Rule 614(d)(2), for
calculating and generating consolidated market data based on this
information.\506\ In addition, as the entities responsible for
generating consolidated market data, competing consolidators would
likely be incentivized by competition to disseminate data using a
protocol or format that results in data that is readily usable by their
subscribers. As market participants are currently able to ingest market
data from different sources, such as the exclusive SIPs and proprietary
data feeds, the Commission preliminarily believes that differences in
the protocols or formats used by competing consolidators would not
likely introduce a new challenge to the market. Rather than impose
technical standards, the Commission preliminarily believes that
competing consolidators would be in the best position to develop
standards with respect to data consistency and generation, as
appropriate, because they would be directly responsible for the quality
of their product that is in compliance with Rule 614(d)(2), and would
be incentivized through competition to create standards to ensure the
integrity of their consolidated market data.
---------------------------------------------------------------------------
\503\ See supra text accompanying notes 455-457.
\504\ Id.
\505\ Id.
\506\ See proposed Rule 614(d)(2).
---------------------------------------------------------------------------
With respect to the Advisory Committee on Market Information's
previous concerns about capacity,\507\ the Commission is proposing to
require each competing consolidator to publish on its website its
capacity statistics on a monthly basis so that market participants can
evaluate whether a competing consolidator has sufficient capacity to
process information.\508\ The Commission is also proposing to require
each competing consolidator to establish, maintain, and enforce written
policies and procedures reasonably designed to ensure that its systems
have levels of capacity to maintain operational capability and assure
the prompt, accurate, and reliable delivery of consolidated market
data.\509\
---------------------------------------------------------------------------
\507\ See supra text accompanying notes 455-457.
\508\ See infra Section IV.B.2(e)(ii).
\509\ Id.
---------------------------------------------------------------------------
The Commission was previously concerned about an increase in
processing costs due to multiple consolidators \510\ performing the
tasks performed by an exclusive SIP. As noted above, the Commission
preliminarily believes that the introduction of competition should help
to ensure that proposed consolidated market data is disseminated in a
cost-effective manner.\511\
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\510\ The Commission preliminarily estimates that there could be
up to twelve competing consolidators. This estimate includes the
CTA/CQ SIP and the Nasdaq UTP SIP. See infra Section V.C.
\511\ See also, e.g., Roundtable Day One Transcript at 49-50
(Prof. Hal Scott, Harvard University) (``[C]ompetition among
consolidators of SIP data . . . could improve the speed and quality
of consolidated sources of market data while also reducing their
costs.''); Treasury Report, supra note 463, at 64 (``The competing
consolidators would aim to provide faster consolidation and
distribution, improved breadth of data, and lower cost than the
SIPs.'').
---------------------------------------------------------------------------
Finally, the Commission was previously concerned about the risk
that fees for core data would increase because payment to each SRO
would be mandatory. The previous competing consolidator model would
have eliminated the Equity Data Plans and contemplated that each
individual exchange would have developed its own pricing scheme for its
individual data. As discussed below, in contrast, under the proposed
decentralized consolidation model, the SROs would continue to develop
jointly the fees associated with the provision of the proposed
consolidated market data through an effective national market system
plan(s) for NMS stocks.\512\ These fees would be subject to Commission
oversight under Rule 608.
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\512\ See infra Section IV.B.4; Proposed Governance Order, supra
note 8; Effective on Filing Proposal, supra note 37 (a proposal to
amend Regulation NMS to rescind a provision that allows a proposed
amendment to an effective national market system plan(s) to become
effective upon filing if the proposed amendment establishes or
changes a fee or other charge).
---------------------------------------------------------------------------
The use of competing consolidators may introduce sequencing risk, a
concern raised by the Advisory Committee on Market Information \513\ as
well as the Commission when it dismissed a competing consolidator model
in proposing Regulation NMS.\514\ Having multiple competing
consolidators using different technology could result in messages being
processed in different sequences. The outcome would be the loss of a
single reference for consolidated market data, which could negatively
impact the reconstruction of the markets at a given point in time.
However, the Commission believes that the proposal would mitigate the
effects of sequencing risk by mandating that the effective national
market system plan(s) require the application of timestamps to all
consolidated market data by the SROs when they send market data to
competing consolidators as well as requiring competing consolidators to
apply timestamps to consolidated market data. Accordingly, no matter
the differences in message processing across the competing
consolidators, the sequencing of market data based on SRO timestamps
should be able to be reconstructed.\515\
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\513\ See supra text accompanying notes 455-457.
\514\ See Regulation NMS Proposing Release, supra note 450, at
11178.
\515\ The Commission further notes that the NBBOs currently
calculated by the exclusive SIPs at different data centers may vary
due to geographic and other forms of latency, and therefore, the
proposed competing consolidator model does not introduce a new issue
in this regard. However, under the proposed competing consolidator
model, NBBOs created at other data centers where the exclusive SIPs
currently do not have a point of presence (e.g., NY4 in Secaucus)
could be more accurate for those market participants that are
located in such data center.
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The Commission believes that there are a number of existing firms
that
[[Page 16776]]
would be well-positioned to become competing consolidators. First,
trading technology firms that today provide proprietary data
aggregation services for their subscribers may decide to register as
competing consolidators in order to potentially expand their subscriber
base and to be eligible for the pricing for data content used to create
proposed consolidated market data.\516\ In addition, the existing
exclusive SIPs, CTA/CQ and Nasdaq UTP, could consider becoming
competing consolidators, as they have extensive experience in this area
and may choose to remain in the market data consolidation business.
Similarly, SROs have experience collecting and processing market data
and may wish to act as competing consolidators. The Commission
preliminarily believes that the creation of a competing consolidator
market would open up the potential for other entrants, as well. For
example, various market participants that are currently self-
aggregating and have the technology to consolidate core data may decide
to enter the competing consolidator business given the potential market
opportunity. Finally, other entities have been interested in performing
as plan processors. For example, there were competing bids to be the
Nasdaq UTP SIP in 2014,\517\ and in 2013 and 2019 for OPRA. The bidding
firms (or similar types of firms) may decide to enter the market as
competing consolidators.
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\516\ The Commission does not know the number of aggregators in
operation today, but assumes that certain market data vendors in the
following list currently perform that function. See Nasdaq: Market
Data Vendors, available at http://www.nasdaqtrader.com/Trader.aspx?id=MarketDataVendorsList&StartAlphabet=A&EndAlphabet=ZZZ
(last accessed Dec. 17, 2019).
\517\ Bidders included Nasdaq, Thesys Technologies LLC,
CenturyLink, and a unit of exchange operator Miami International
Holdings Inc. See Herbert Lash, Nasdaq Wins Bid to Manage Key Data
Processor for Stock Trading, Reuters (Nov. 5, 2014), available at
https://www.reuters.com/article/us-exchanges-stocktrading-nasdaq-omx-idUSKBN0IQ00220141106.
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The Commission preliminarily believes that sufficient incentives
exist to attract a number of entities to register as competing
consolidators and for a competitive market to develop. For one thing,
the proposed definition of core data will incorporate additional
elements such as quotation data in smaller size increments, depth of
book data, and auction information, all of which market participants
have recommended as necessary or useful. Therefore, there seems to be
demand for the key product--i.e., consolidated market data as
proposed--that competing consolidators will be producing and selling.
Moreover, the proposed competing consolidator registration regime and
responsibilities outlined below--while designed to collect relevant
information about competing consolidators and to require competing
consolidator performance data, data quality issues, and system issues
to be made publicly available--are intended to be a relatively
streamlined process that would impose appropriate burdens on entities
likely to register as competing consolidators.
Several Roundtable panelists and commenters raised potential issues
about a competing consolidator model, in particular, about
uncertainties regarding control over market data access, the costs of
obtaining market data from the various SROs, and operational
complexities associated with the model, such as the introduction of
multiple NBBOs.\518\ However, the Commission preliminarily believes
that some of these issues would be addressed by the proposal and the
others would not be novel or insurmountable. On control over market
data access, Rule 603 and the proposed amendments to Rule 603(b) would
require that the SROs directly make available to competing
consolidators and self-aggregators NMS information, including all data
necessary to generate consolidated market data, on terms that are fair
and reasonable and not unreasonably discriminatory. With respect to the
costs of market data, the SRO fees associated with consolidated market
data would be subject to Equity Data Plan requirements and the fees
must be fair and reasonable.\519\ Finally, with respect to the concerns
regarding the complexities associated with a competing consolidator
model, many of the functions of competing consolidators are performed
today by market participants, such as the consolidation of proprietary
data feeds and calculation of NBBOs.\520\
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\518\ See Roundtable Day One Transcript at 151-152 (Oliver
Albers, Nasdaq); Roundtable Day Two Transcript at 46-47 (Michael
Blaugrund, NYSE), at 61 (Prof. Robert Bartlett, U.C. Berkeley);
Wittman Letter at 14; Albers Letter at 3; Blaugrund Letter, at 2;
Healthy Markets Association Letter I, at 38; Data Boiler Letter at
4, 8.
\519\ See supra note 439.
\520\ For example, multiple NBBOs exist today because many
broker-dealers independently calculate it for themselves.
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Finally, a Roundtable panelist suggested that multiple NBBOs could
raise concerns about broker-dealers executing customer orders at prices
that are in the broker's own interest, rather than the customers'
interest, and questioned whether a competing consolidator model would
introduce benchmark reference price arbitrage.\521\ A broker-dealer
must provide best execution to its customers' orders.\522\ However, the
existence of multiple NBBOs, which occurs today, does not impact a
broker's best execution obligations. Further, the panelist questioned
whether there would be conflicts for broker-dealers that execute
customer trades as well as manage the price against which the trades
are benchmarked (i.e., by calculating the NBBO). Broker-dealers today
purchase market data from the SIP as well as proprietary data feeds and
calculate NBBOs. Accordingly, the Commission is not persuaded by
concerns about the introduction of multiple NBBOs because multiple
NBBOs already exist.
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\521\ See Roundtable Day One Transcript at 151-152 (Oliver
Albers, Nasdaq); Roundtable Day Two Transcript at 61 (Prof. Robert
Bartlett, U.C. Berkeley); Data Boiler Letter at 4.
\522\ See supra note 308.
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(d) Proposed Definition of Competing Consolidator in Rule 600(b)
The Commission is proposing to introduce a definition of competing
consolidator in Rule 600(b). Specifically, under proposed Rule
600(b)(16) of Regulation NMS, a competing consolidator would be defined
as a securities information processor required to be registered
pursuant to Rule 614 or a national securities exchange or national
securities association that receives information with respect to
quotations for and transactions in NMS stocks and generates
consolidated market data for dissemination to any person.
The Commission requests comment on the proposed amendment to Rule
600(b) to introduce a definition of ``competing consolidator.'' In
particular, the Commission solicits comment on the following:
73. Is a decentralized consolidation model with competing
consolidators and self-aggregators a viable and/or appropriate model
for the collection, consolidation, and dissemination of consolidated
market data? Are there any other viable and/or appropriate
alternatives?
74. Do commenters believe that the definition of competing
consolidator accurately captures the requisite functions necessary for
collecting, consolidating, and disseminating consolidated market data?
Do commenters believe that there would be sufficient interest in
entities that would become competing consolidators?
75. Do commenters believe that competing consolidators would
provide the necessary competition to lower the processing time and
distribution speeds
[[Page 16777]]
for consolidated market data, as proposed to be defined, as well as
reduce the overall costs of proposed consolidated market data?
76. Do commenters believe that concerns identified by the
Commission regarding the competing consolidator model considered in the
Regulation NMS Proposing and Adopting Releases would be sufficiently
addressed with the proposed decentralized consolidation model with
competing consolidators and self-aggregators proposed in this release?
If not, how should these concerns be addressed?
77. Will the change to a proposed competing consolidator/self-
aggregator model present any specific operational and/or regulatory
challenges to market participants? Are the challenges evenly
distributed amongst market participants or would one set of market
participants bear more of any burden? If so, please describe.
78. The Commission solicits commenters' views regarding the various
concerns raised by Roundtable respondents about the competing
consolidator model. In particular, do commenters have any concerns
about competing consolidators calculating independent NBBOs? Please
explain. Do commenters have concerns about multiple versions of
consolidated market data, as proposed? Please explain. If there are
such concerns, please also explain how these concerns would vary from
the multiple different forms of aggregation that exist today among
broker-dealers either self-aggregating proprietary data feeds or
utilizing vendors to do so on their behalf.
(e) Proposed Rule 614
The Commission preliminarily believes that SIPs that wish to act as
competing consolidators should be required to register with the
Commission \523\ and be required to publicly disclose certain
information about their organization, operations, and products. The
proposed disclosure framework is similar to the disclosures currently
required under Form SIP, with differences tailored to the proposed
regulatory structure that would apply to competing consolidators. As
described more fully below, a competing consolidator would be required
to register with the Commission on proposed Form CC and to amend its
Form CC (i) prior to the implementation of a material change to the
competing consolidator's pricing, connectivity, or products offered (a
``Material Amendment''); and (ii) no later than 30 calendar days after
the end of each calendar year to correct information that has become
inaccurate or incomplete for any reason and to provide an Annual Report
as required under Form CC (each a ``Form CC Amendment'').\524\ A
competing consolidator would be required to publish notice of its
cessation of operations on Form CC at least 30 business days prior to
the date it ceases to operate as a competing consolidator.\525\ The
Commission would make public on its website each effective initial Form
CC, order of ineffective initial Form CC, Form CC Amendment, and notice
of cessation.\526\
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\523\ As explained further below, SROs are excluded from the
definition of SIP under Section 3(a)(22)(A) of the Exchange Act. 15
U.S.C. 78c(a)(22)(A). SROs that wish to act as competing
consolidators would therefore not be required to register with the
Commission on proposed Form CC, which, as explained below, is the
form that SIPs would use to register as competing consolidators. See
infra Section IV.B.2(e)(iii). However, SROs that wish to act as
competing consolidators would be subject to the other requirements
of proposed Rule 614, including the responsibilities of competing
consolidators enumerated in proposed Rule 614(d), such as the
monthly publication of performance metrics. See infra Section
IV.B.2(e)(ii).
\524\ See proposed Rules 614(a)(1)(i) and (a)(2)(i) and (ii).
\525\ See proposed Rule 614(a)(3).
\526\ See proposed Rule 614(b)(2). The Commission would publish
an effective initial Form CC upon effectiveness and would publish a
Form CC Amendment no later than 30 calendar days from the date of
filing. See proposed Rule 614(b)(2)(iii).
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The Commission also preliminarily believes that competing
consolidators should be subject to certain obligations and should
regularly publish certain performance statistics on a monthly basis on
their respective websites pursuant to proposed Rules 614(d)(5) and
(6).\527\ These disclosures are similar to disclosures currently made
by the exclusive SIPs.
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\527\ See infra Section IV.B.2(e)(ii) for a discussion of the
obligations and performance statistics. The information that the
Commission is proposing that competing consolidators publish is
based upon information that is currently collected or produced by
the CTA/CQ SIP and the Nasdaq UTP SIP, either for public or internal
distribution.
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These requirements, together with the operational transparency
proposed in new Form CC for those SIPs that register as competing
consolidators,\528\ should help to ensure that consolidated market
data, as proposed to be defined, is provided in a prompt, accurate, and
reliable manner and that all competing consolidators disclose the same
information to allow for easier comparison and evaluation.
Specifically, these requirements should allow market participants to
effectively evaluate competing consolidators and foster competition
among competing consolidators, which should result in high levels of
performance in the provision of proposed consolidated market data. In
addition, these requirements should facilitate Commission oversight of
competing consolidators and help to ensure the resiliency of their
systems.
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\528\ See infra Section IV.B.2(e)(iii) for a discussion of
proposed Form CC.
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(i) Section 11A(b) of the Exchange Act
Section 11A(b)(1) of the Exchange Act \529\ provides that a SIP not
acting as the ``exclusive processor'' \530\ of any information with
respect to quotations for or transactions in securities is exempt from
the requirement to register with the Commission as a SIP unless the
Commission, by rule or order, determines that the registration of such
SIP ``is necessary or appropriate in the public interest, for the
protection of investors, or for the achievement of the purposes of
[Section 11A].'' A SIP that proposes to act as a competing consolidator
would not engage on an exclusive basis on behalf of any national
securities exchange or registered securities association in collecting,
processing, or preparing for distribution or publication any
information with respect to quotations for or transactions in
securities; therefore, such a proposed competing consolidator would not
fall under the statutory definition of ``exclusive processor.''
However, under the proposed rules, competing consolidators would play a
vital role in the national market system by collecting, consolidating,
and disseminating proposed consolidated market data. Because the
availability of prompt, accurate, and reliable consolidated market
data, as proposed, is essential to investors and other market
participants, the Commission preliminarily believes that it is
necessary and appropriate in the public interest and for the protection
of investors to require each SIP that wishes to act as a competing
consolidator to register with the Commission as a SIP pursuant to
proposed Rule 614. Section 11A(b)(1) provides the Commission with
authority to require the registration of a SIP not acting as an
exclusive processor by rule or order. The Commission is exercising this
authority by proposing Rule 614 to establish the process by which SIPs
that wish to act as competing consolidators would be required to
register with the Commission.
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\529\ 15 U.S.C. 78k-1(b)(1).
\530\ See supra note 20.
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The registration process for exclusive SIPs under Section 11A
requires the Commission to publish notice of an exclusive SIP's
application for registration and, within 90 days of publication of
notice of the application,
[[Page 16778]]
by order grant the application or institute proceedings to determine
whether the registration should be denied.\531\ At the conclusion of
the proceedings, the Commission must, by order, grant or deny the
registration.\532\ Section 11A(b)(1) of the Exchange Act also
authorizes the Commission, by rule or by order, upon its own motion or
by application, to conditionally or unconditionally exempt any SIP or
class of SIPs from any provision of Section 11A or the rules or
regulations thereunder if the Commission finds that such exemption is
consistent with the public interest, the protection of investors, and
the purposes of Section 11A, including the maintenance of fair and
orderly markets in securities and the removal of impediments to and
perfection of the mechanisms of a national market system. The
Commission preliminarily believes that it is consistent with the public
interest, the protection of investors, and the purposes of Section 11A
to use its authority under Section 11A(b)(1) to exempt SIPs that wish
to act as competing consolidators from the registration process
established in Section 11A(b)(3) of the Exchange Act and to allow such
competing consolidators to register pursuant to a process that is more
streamlined and limited than the process described in Section
11A(b)(3). The process specified in Section 11A(b)(3) of the Exchange
Act was developed for exclusive SIPs and reflects the heightened need
to review and analyze exclusive processors. In contrast, SIPs that do
not act as an exclusive SIP are exempt from registration unless the
Commission ``finds that the registration of such securities information
processor is necessary or appropriate in the public interest, for the
protection of investors, or for the achievement of the purposes of
[Section 11A].'' The Commission preliminarily believes that the
proposed registration process would provide the Commission with the
information necessary to oversee competing consolidators and help
ensure that relevant information regarding such competing consolidators
is available to the Commission and to the public, while providing a
streamlined registration process designed to encourage entities to
register as competing consolidators.
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\531\ See Section 11A(b)(3), 15 U.S.C. 78k-1(b)(3).
\532\ See Section 11A(b)(3)(B), 15 U.S.C. 78k-1(b)(3)(B).
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The registration process proposed in new Rule 614 requires any
person, other than an SRO,\533\ that chooses to become a competing
consolidator to file with the Commission proposed Form CC.\534\ The
Commission would review the initial Form CC and such filing would
become effective, unless declared ineffective by the Commission by
order.\535\ The Commission would make public on its website each
effective initial Form CC and any order of ineffective initial Form CC,
amendment to Form CC and notice of cessation, if applicable. The
registration process proposed in new Rule 614 would not require the
publication for notice and comment of an application for registration
as a competing consolidator, nor would it require Commission approval
of such an application. However, the Commission preliminarily believes
that it is consistent with the public interest, the protection of
investors, and the purposes of Section 11A to establish a relatively
streamlined registration process based on disclosure for those SIPs
that wish to act as competing consolidators. The Commission
preliminarily believes that a relatively streamlined registration
process would impose minimal burdens on entities likely to register as
competing consolidators.
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\533\ See supra note 523.
\534\ See infra Sections IV.B.2(e)(ii) and IV.B.2(e)(iii) for a
discussion of the registration process for competing consolidators
under proposed Rule 614.
\535\ Proposed Rule 614(a)(1)(iii) provides that the Commission
may, by order, declare an initial Form CC ineffective no later than
90 calendar days from the date of filing with the Commission.
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In addition, the Commission preliminarily believes that it is
consistent with the public interest, the protection of investors, and
the purposes of Section 11A to use its exemptive authority under
Section 11A(b)(1) of the Exchange Act to exempt those SIPs that act as
competing consolidators from Section 11A(b)(5) of the Exchange
Act,\536\ which requires a registered SIP to notify the Commission if
the SIP prohibits or limits any person with respect to access to its
services. Section 11A(b)(5) allows any person aggrieved by a
prohibition or limitation of such access to the SIP's services to
petition the Commission to review the prohibition or limitation of
access. Exclusive SIPs, by definition, engage on an exclusive basis in
collecting, processing, or preparing data. In contrast, the proposed
competing consolidators would not engage in collecting, processing, or
preparing data on an exclusive basis. Therefore, the Commission
preliminarily believes that the protections of Section 11A(b)(5) of the
Exchange Act, including the ability of an aggrieved person to petition
the Commission for review of a SIP's prohibition or limitation of
access to the SIP's services, are not necessary for the SIPs that
register as competing consolidators. The Commission preliminarily
believes that competitive forces would reduce the likelihood that a
subscriber would not be able to access consolidated market data as
proposed because a subscriber should be able to obtain such data from
another competing consolidator. Accordingly, the Commission
preliminarily believes that it would be consistent with the protection
of investors and the public interest to exempt competing consolidators
from Section 11A(b)(5) of the Exchange Act.
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\536\ Section 11A(b)(5) of the Exchange Act, 15 U.S.C. 78k-
1(b)(5), requires a SIP promptly to notify the Commission if the
registered SIP prohibits or limits any person in respect of access
to services offered, directly or indirectly, by the registered SIP.
The notice must be in the form and contain the information required
by the Commission. Any prohibition or limitation on access to
services with respect to which a registered SIP is required to file
notice is subject to review by the Commission on its own motion, or
upon application by any person aggrieved by the prohibition or
limitation.
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The Commission requests comment on the proposal to establish a
registration process for SIPs that wish to act as competing
consolidators and to exempt such competing consolidators from Section
11A(b)(5) of the Exchange Act. In particular, the Commission solicits
comment on the following:
79. Do commenters agree that the SIPs that wish to act as proposed
competing consolidators should be required to register with the
Commission? Do commenters agree that such competing consolidators
should be subject to the proposed registration requirements in proposed
Rule 614, rather than the registration requirements set forth in
Section 11A(b) of the Exchange Act? Why or why not?
80. Do commenters believe that the Commission should establish a
registration process for competing consolidators different from the
registration process in proposed Rule 614? If so, please describe.
Should competing consolidator registration be subject to Commission
approval and/or additional or different regulation? Why or why not? If
so, please describe.
81. Do commenters believe that competition and market forces would
be sufficient to support the proposed registration regime for SIPs that
wish to act as competing consolidators? Why or why not?
82. Do commenters agree that the Commission should exempt SIPs that
register as competing consolidators from Section 11A(b)(5) of the
Exchange Act? Why or why not?
83. Do commenters believe that competition and market forces are
[[Page 16779]]
sufficient to ensure that market participants would have access to
consolidated market data as proposed? Why or why not?
(ii) Description of Proposed Rule 614
Proposed Rule 614(a)(1)(i) would prohibit any person, other than an
SRO,\537\ from (i) receiving directly from a national securities
exchange or national securities association information with respect to
quotations for and transactions in NMS stocks; and (ii) generating the
proposed consolidated market data for dissemination to any person
(i.e., acting as a competing consolidator by disseminating data to
external parties) unless that person files with the Commission an
initial Form CC and the initial Form CC has become effective pursuant
to proposed Rule 614(a)(1)(v).\538\ The Commission preliminarily
believes that a SIP that wishes to act as a competing consolidator
should not be permitted to commence operations until the Commission has
had the opportunity to review such competing consolidator's initial
Form CC. The Commission's review of initial Form CC would help to
ensure that a SIP that wishes to register as a competing consolidator
makes disclosures that comply with the requirements of proposed Rule
614 and that a consistent level of information, and consistent
disclosures, are made available to market participants to evaluate such
competing consolidators.
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\537\ As noted above, SROs are excluded from the definition of
SIP in Section 3(a)(22)(A) of the Exchange Act and therefore would
not be required to register as a competing consolidator pursuant to
proposed Rules 614(a)-(c) and proposed Form CC. However, SROs are
regulated entities, and an SRO competing consolidator would be
required to provide information equivalent to that required by
proposed Form CC. For example, national securities exchanges must
file information about their control persons, officers, and
directors, and affiliates on Form 1 that is similar to the
disclosures required under Exhibits A-D of proposed Form CC. See
Form 1 Instructions, at Exhibits C, J, and K, available at https://www.sec.gov/files/form1.pdf (last accessed Jan. 8, 2020). In
addition, SRO competing consolidators would be required to file with
the Commission all proposed rule changes pursuant to Section 19(b)
of the Exchange Act and Rule 19b-4 thereunder to begin operations as
a competing consolidator, including rule changes related to the SRO
competing consolidator's operations, disclosures regarding
consolidated market data products, and all fees related to
consolidated market data products. The other requirements of
proposed Rule 614--specifically, the responsibilities of competing
consolidators enumerated in proposed Rule 614(d), as described
below, including the monthly performance metrics and other
information required under proposed Rules 614(d)(5) and (d)(6)--
would apply to any competing consolidator, including any SRO that
acts as a competing consolidator. An SRO, however, would have a
choice of the manner in which--and the regulatory regime that would
apply to--its competing consolidator business: An SRO could operate
a competing consolidator as a facility of the SRO, which would be
subject to the rule filing requirements of Section 19(b) of the
Exchange Act and Rule 19b-4 thereunder, or the SRO could operate a
competing consolidator in a separate affiliated entity, not as a
facility, which, like other competing consolidators, would be
subject to the proposed registration requirements under proposed
Rule 614.
\538\ In contrast, a self-aggregator would be defined as any
broker-dealer that receives information with respect to quotations
for and transactions in NMS stocks and generates consolidated market
data solely for internal use, and therefore would not be a competing
consolidator. See infra Section IV.B.3. If a self-aggregator
disseminated consolidated market data to any person, it would be
acting as a competing consolidator and would be required to register
pursuant to proposed Rule 614 and comply with the requirements
applicable to competing consolidators.
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Proposed Rule 614(a)(1)(ii) would require any reports required
under new Rule 614 to be filed electronically on Form CC, include all
of the information as prescribed in Form CC and the instructions to
Form CC, and contain an electronic signature.\539\ The electronic
signature requirement is consistent with the intention of the
Commission to receive documents that can be readily accessed and
processed electronically.
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\539\ This proposed requirement is consistent with electronic
reporting standards set forth in other Commission rules under the
Exchange Act, such as Rule 17a-25 (Electronic Submission of
Securities Transaction Information by Exchange Members, Brokers, and
Dealers). See 17 CFR 240.17a-25.
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The proposed rule contemplates the use of an online filing system
through which competing consolidators would file a completed Form CC.
The system, known as the electronic form filing system (``EFFS'') is
currently used by SROs to submit Form 19b-4 filings and by SCI entities
to submit Form SCI filings.\540\ Other methods of electronic filing of
Form CC could include the use of secure file transfer through
specialized electronic mailbox or through the Electronic, Data
Gathering, Analysis and Retrieval (``EDGAR'') system, or directly
through SEC.GOV via a simple HTML form. Based on the widespread use and
availability of the internet, the Commission believes that filing Form
CC in an electronic format would be less burdensome and a more
efficient filing process for competing consolidators and the Commission
because it is likely to be less expensive and cumbersome than mailing
and filing paper forms with the Commission.
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\540\ See Securities Exchange Act Release No. 50486 (Oct. 4,
2004), 69 FR 60287 (Oct. 8, 2004) (adopting the EFFS for use in
filing Form 19b-4).
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In addition, proposed Rule 614(a)(1)(ii) would establish a uniform
manner in which the Commission would receive, and competing
consolidators would provide, reports made pursuant to proposed Rule
614. The standardization would make it easier and more efficient for
the Commission to promptly review and analyze the information that
competing consolidators provide.
Proposed Rule 614(a)(1)(iii) would provide that the Commission may,
by order, declare an initial Form CC filed by a competing consolidator
ineffective no later than 90 calendar days from filing with the
Commission.\541\ The Commission preliminarily believes that 90 calendar
days would provide the Commission with adequate time to carry out its
oversight functions with respect to its review of an initial Form CC,
including its responsibilities to protect investors and maintain fair,
orderly, and efficient markets.
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\541\ See also proposed Rule 614(a)(1)(iv)(B).
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Proposed Rule 614(a)(1)(iv) would require a competing consolidator
to withdraw an initial Form CC that has not become effective if any
information disclosed in the initial Form CC is or becomes inaccurate
or incomplete. The competing consolidator would be able to refile an
initial Form CC pursuant to proposed Rule 614(a)(1). The Commission
preliminarily believes that it would be appropriate to require an
initial Form CC to be withdrawn if any information in the form is or
becomes inaccurate or incomplete to assure that the Commission's review
is based on accurate and complete information and to assure that the
Commission has adequate time to review an accurate and complete initial
Form CC.
Proposed Rule 614(a)(1)(v)(A) would provide that an initial Form CC
would become effective, unless declared ineffective, no later than the
expiration of the review period provided in paragraph (a)(1)(iii) and
upon publication of the initial Form CC pursuant to proposed Rule
614(b)(2)(i).
Proposed Rule 614(a)(1)(v)(B) would provide that the Commission
would declare ineffective an initial Form CC if it finds, after notice
and opportunity for hearing, that such action is necessary or
appropriate in the public interest and is consistent with the
protection of investors. The Commission also preliminarily believes
that it would be necessary and appropriate in the public interest, and
consistent with the protection of investors, to declare ineffective an
initial Form CC if it finds, after notice and opportunity for hearing,
that one or more disclosures reveal non-compliance with federal
securities laws or the rules or regulations thereunder. The Commission
also would make such a declaration if it finds, for example, that one
or more disclosures on the initial Form CC were materially deficient
with respect to their accuracy,
[[Page 16780]]
currency, or completeness. The Commission preliminarily believes that
market participants would use the Form CC disclosure to understand and
evaluate the operations of a competing consolidator and to help
determine whether to subscribe to a competing consolidator. A
disclosure on Form CC that is materially deficient with respect to its
completeness or comprehensibility could mislead market participants or
impede their ability to evaluate a competing consolidator. In addition,
the Commission intends to use the information disclosed on an initial
Form CC to exercise oversight over competing consolidators. Given these
potential uses, the Commission believes that it is important that an
initial Form CC contain disclosures that are accurate, current, and
complete. During its review, the Commission and its staff may provide
comments to the applicant and may request that the applicant supplement
information in its initial Form CC or revise its disclosures on its
initial Form CC.\542\
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\542\ The responsibility for accurate, current, and complete
disclosures on proposed Form CC would lie with the competing
consolidator. The Commission's review of an initial Form CC would
focus on an evaluation of the completeness and accuracy of the
disclosures and compliance with federal securities laws. The
Commission's evaluation regarding compliance with federal securities
laws would involve a review of the Form CC disclosures for apparent
non-compliance with federal securities laws, or other rules or
regulations thereunder, and would focus on the disclosures made on
the Form CC.
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If the Commission declares an initial Form CC ineffective, the
applicant would be prohibited from operating as a competing
consolidator. An initial Form CC declared ineffective would not prevent
the competing consolidator from subsequently filing a new Form CC that
attempted to address any disclosure deficiencies or other issues that
caused the initial Form CC to be declared ineffective.
The Commission requests comment on proposed Rule 614(a)(1), which
establishes filing requirements for an initial Form CC and a Commission
review period for determining whether a filed initial Form CC should be
declared ineffective. In particular, the Commission solicits comment on
the following:
84. Do commenters believe that the proposed electronic filing
requirement is appropriate? Are there methods other than EFFS that
would be appropriate? If so, please describe. Is EFFS an efficient
system for filing proposed Form CC? Would another system be more
efficient? If so, please specify and describe the rationale for using a
different system.
85. Should the Commission adopt the proposal that an initial Form
CC will become effective by operation of rule without the Commission
issuing an order declaring effective the initial Form CC? Do commenters
believe that publishing an initial Form CC on the Commission's website,
without a Commission order declaring an initial Form CC effective,
would provide sufficient notice that an initial Form CC has become
effective? Why or why not? Please support your arguments.
86. Should the Commission require the existing exclusive SIPs to
file an initial Form CC before they may become competing consolidators
if they decide to act as competing consolidators? Why or why not?
Please support your arguments.
87. Do commenters believe that the process to declare a Form CC
ineffective is appropriate? Why or why not?
88. Do commenters believe that an SRO seeking to operate a
competing consolidator would establish the competing consolidator
within the SRO or in a separate affiliated entity? What do commenters
believe would be the advantages and disadvantages of each form of
operation? Do commenters believe that an SRO competing consolidator
would have any advantages over a competing consolidator registered
pursuant to proposed Rules 614(a)-(c) and proposed Form CC?
89. If an SRO decides to act as a competing consolidator, should it
be required to file a specific notice of its intent to operate as a
competing consolidator in addition to, or in lieu of, a Form 19b-4 with
the Commission? Would a Form 19b-4 filing by itself provide sufficient
notice that an SRO intends to act as a competing consolidator? Please
explain.
The Commission is proposing Rule 614(a)(2) to provide the
requirements for amending an effective Form CC. Under proposed Rule
614(b)(2)(iii), the Commission will make public any Form CC Amendment,
as described below, no later than 30 calendar days from the date of its
filing with the Commission. Proposed Form CC is similar to Form SIP and
the information required to be filed on proposed Form CC is designed to
enable market participants to make informed decisions when selecting a
competing consolidator and to facilitate Commission oversight of
competing consolidators. As described more fully below,\543\ proposed
Form CC would require information concerning, among other things: The
legal name and legal status of the competing consolidator; the owners,
directors, officers, and governors of the competing consolidator, or
persons performing similar functions; whether the competing
consolidator is a broker-dealer or an affiliate of a broker-dealer and
a description of the organizational structure of the competing
consolidator; contact information for an employee of the competing
consolidator prepared to respond to questions regarding Form CC; a
description of each consolidated market data service or function,
including connectivity and delivery options for subscribers, and a
description of all procedures utilized for the collection, processing,
distribution, publication and retention of information with respect to
quotations for, and transactions in, securities; a description of all
market data products with respect to consolidated data, or a subset
thereof, that the competing consolidator provides to subscribers; a
description of fees and charges for use of the competing consolidator
with respect to consolidated market data, including the types, range,
and structure of the competing consolidator's fees and differentiation
among the types of subscribers; a description of any co-location and
related services, the terms and conditions for co-location,
connectivity, and related services, including connectivity and
throughput options offered, and a description of any other means
besides co-location and related services to increase the speed of
communication, including a summary of the terms and conditions for its
use; and a narrative description, or the functional specifications, of
each consolidated market data service or function, including
connectivity and delivery options for the subscribers.
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\543\ See infra Section IV.B.2(e)(iii).
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The Commission is proposing Rule 614(a)(2)(i) to require a
competing consolidator to amend an effective Form CC in accordance with
the instructions therein: (i) Prior to the date of implementation of a
material change to the pricing, connectivity, or products offered; and
(ii) no later than 30 calendar days after the end of each calendar year
to correct information, whether material or immaterial, that has become
inaccurate or incomplete for any reason (``Annual Report''). The
Commission preliminarily believes that a change to a competing
consolidator's pricing, connectivity, or products offered would be
material if there is a substantial likelihood that a reasonable market
participant would consider the change important when evaluating the
competing consolidator as a provider of market data.\544\
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\544\ See Securities Exchange Act Release No. 833633 (July 18,
2018), 83 FR 38768 (Aug. 7, 2018) (Regulation of NMS Stock
Alternative Trading Systems) (stating that a change to the
operations of an NMS Stock ATS, or the disclosures regarding the
activities of the broker-dealer operator of the NMS Stock ATS and
its affiliates, would be material if there is a substantial
likelihood that a reasonable market participant would consider the
change important when evaluating the NMS Stock ATS as a potential
trading venue).
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[[Page 16781]]
The Commission preliminarily believes that the proposal to amend an
effective Form CC prior to implementing a Material Amendment would
provide market participants with information concerning changes to
significant aspects of the competing consolidator's services, which
would assist market participants in evaluating, or re-evaluating, the
competing consolidator as a provider of market data. The Commission
preliminarily believes that requiring a competing consolidator to amend
an effective Form CC no later than 30 calendar days after the end of
each calendar year to correct any other information that has become
inaccurate or incomplete for any reason would help to ensure that
market participants have accurate and current information regarding
competing consolidators. The Commission preliminarily believes that
providing a mechanism for competing consolidators to disclose changes
to their operations or to update information that does not constitute a
Material Amendment (e.g., a change in the organizational structure of
the competing consolidator, its officers or directors, or its
affiliated entities) no later than 30 calendar days after the end of
each calendar year would tailor the reporting burden on competing
consolidators to the degree of significance of the change in a manner
that does not compromise the ability of market participants to obtain
information about the competing consolidator's operations.
The Commission believes that market participants would use
information regarding a competing consolidator's organization,
operational capability, market data products, fees, and co-location and
related services to determine whether to subscribe, or continue
subscribing, to a competing consolidator. In addition, this information
would assist market participants in evaluating which products and
services of the competing consolidator would be most useful to them.
The information in proposed Form CC is also designed to ensure that the
Commission has specified information regarding entities acting as
competing consolidators, to facilitate the Commission's oversight of
competing consolidators and help to ensure the resiliency of a
competing consolidator's systems. Given these intended uses, the
Commission believes that it is important for a competing consolidator
to maintain an accurate, current, and complete Form CC.
The Commission requests comment on proposed Rule 614(a)(2), which
establishes filing requirements for Form CC Amendments. In particular,
the Commission solicits comment on the following:
90. In addition to material changes to a competing consolidator's
pricing, connectivity, or products, what should be a Material
Amendment?
91. Do commenters believe that a competing consolidator should be
required to file a Material Amendment within a specified time prior to
implementing the change that constitutes a Material Amendment? Why or
why not? Please support your arguments. Is 30 days an appropriate
amount of time for a Material Amendment to be filed?
92. Do commenters believe that a competing consolidator should be
required to file an Annual Report? Why or why not? Proposed Rule
614(a)(3) would require a competing consolidator to provide notice of
its cessation of operations on Form CC at least 30 business days before
the date the competing consolidator ceases to operate as a competing
consolidator. The notice of cessation would cause the Form CC to become
ineffective on the date designated by the competing consolidator. This
requirement would provide notice to the public and the Commission that
the competing consolidator intends to cease operations. The Commission
preliminarily believes that this notice would provide market
participants with time to find and select an alternative provider of
market data.
The Commission requests comment on proposed Rule 614(a)(3), which
establishes filing requirements for a Form CC notice of cessation. In
particular, the Commission solicits comment on the following:
93. Should the Commission require a competing consolidator to give
notice that it intends to cease operations 30 business days or more
before ceasing operations as a competing consolidator? If not, why not?
Is 30 business days an appropriate time for providing notice of an
intention to cease operations? If not, what time period would be
appropriate?
In proposed Rule 614(b), the Commission is proposing to make public
all Form CC reports filed by competing consolidators and other
information. Under proposed Rule 614(b)(1), every Form CC filed
pursuant to Rule 304 shall constitute a ``report'' within the meaning
of Sections 11A, 17(a), 18(a), and 32(a), and any other applicable
provisions of the Exchange Act. Because proposed Form CC is a report
that is required to be filed under the Exchange Act, it would be
unlawful for any person to willfully or knowingly make, or cause to be
made, a false or misleading statement with respect to any material fact
in Form CC. Under proposed Rule 614(b)(2), the Commission would make
public via posting on the Commission's website each: (i) Effective
initial Form CC; (ii) order of ineffective Form CC; (iii) filed Form CC
Amendment; and (iv) notice of cessation. Under the proposed rule, the
Commission would publish each Form CC Material Amendment and Annual
Report on its website no later than 30 days after the competing
consolidator filed the amendment.
The Commission preliminarily believes that making each Form CC
filing public via public posting on the Commission's website would
provide market participants with important information about the
operations of a competing consolidator and facilitate the Commission's
oversight of competing consolidators. The Commission preliminarily
believes that this information should be easily accessible to all
market participants so that market participants may better evaluate a
competing consolidator as a potential provider of market data.
Additionally, the Commission preliminarily believes that the
publication of Material Amendments and Annual Reports would provide
market participants with information necessary to evaluate, or re-
evaluate, a competing consolidator as a provider of market data,
facilitate the Commission's oversight of competing consolidators, and
help to ensure the continued resiliency of a competing consolidator's
systems.
The Commission requests comment on proposed Rule 614(b), which
would establish public disclosure requirements for Form CC filings. In
particular, the Commission solicits comment on the following:
94. Do commenters believe that the Commission should post on its
website each effective initial Form CC, each notice of ineffectiveness
of a Form CC, each Form CC Amendment, and each notice of cessation? Why
or why not? Please support your arguments. Do commenters believe a
competitive marketplace would provide competing consolidators with
incentives to disclose sufficient information in the normal course of
business? Why or why not?
[[Page 16782]]
The Commission preliminarily believes that it would be helpful for
a competing consolidator to make market participants aware that the
competing consolidator's filings are publicly posted on the
Commission's website. Therefore, proposed Rule 614(c) would require
each competing consolidator to post on its website a direct URL
hyperlink to the Commission's website that contains the documents
enumerated in proposed Rule 614(b)(2), which includes the competing
consolidator's Form CC filings. The Commission preliminarily believes
that this requirement would make it easier for market participants to
review a competing consolidator's Form CC filings by providing an
additional means for market participants to locate Form CC filings that
are posted on the Commission's website.
The Commission requests comment on proposed Rule 614(c), which
would require each competing consolidator to provide a direct URL
hyperlink to the Commission's website that contains the documents
identified in proposed Rule 614(b)(2). In particular, the Commission
solicits comment on the following:
95. Do commenters believe that proposed Rule 614(c) should require
each competing consolidator to provide a direct URL hyperlink to the
Commission's website that contains the documents identified in proposed
Rule 614(b)(2). Why or why not? Please support your arguments.
Under the proposed decentralized consolidation model, competing
consolidators would be required to perform many of the obligations
currently performed by the existing exclusive SIPs. Proposed Rule
614(d) establishes the responsibilities applicable to competing
consolidators, which also includes the disclosure of information that
would facilitate the Commission's oversight of competing consolidators
and assist market participants in choosing and evaluating competing
consolidators. Proposed Rule 614(d)(1) would require each competing
consolidator to collect from each national securities exchange and
national securities association, either directly or indirectly, the
information with respect to quotations for and transactions in NMS
stocks as provided in Rule 603(b), which would include all data
necessary to generate the proposed consolidated market data. Proposed
Rule 614(d)(2) would require each competing consolidator to calculate
and generate consolidated market data, as defined in proposed Rule
600(b)(16), from the information collected in proposed Rule 614(d)(1).
Proposed Rule 614(d)(3) would require competing consolidators to make
the proposed consolidated market data available to subscribers on a
consolidated basis and on terms that are not unreasonably
discriminatory, with the timestamps required by proposed Rule 614(d)(4)
and Rule 614(e)(1)(ii), as discussed below.
As noted above, competing consolidators would be required under
proposed Rule 614(d)(2) to calculate and generate proposed consolidated
market data and make proposed consolidated market data available to
subscribers. Accordingly, all competing consolidators would be required
to develop a consolidated market data product that contains all of the
data elements provided under the proposed definition of consolidated
market data. In addition, competing consolidators could develop other
market data products that contain only a subset of consolidated market
data elements (e.g., a TOB product) and could develop market data
products that contain elements that go beyond the elements required
under the proposed definition of consolidated market data (e.g., a full
DOB product). The Commission recognizes that market participants have
varying needs with respect to market data, and the proposed rules would
permit a competing consolidator to offer additional market data
products to meet these needs so long as the competing consolidator
complies with proposed Rules 614(d)(2) and (d)(3) by providing a
consolidated market data product.\545\
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\545\ See supra Section III.A.
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The Commission preliminarily believes that the proposed provisions
are both necessary and appropriate because they reflect the main
obligations of competing consolidators, which are to collect,
calculate, and disseminate consolidated market data, as proposed. In
addition, the use of a competing consolidator at a specific data center
would likely be more accurate and useful in assessing the trading
activity of a trading participant in that same data center. As
proposed, competing consolidators would be the only entities providing
proposed consolidated market data to market participants. Accordingly,
the terms by which they provide proposed consolidated market data to
their subscribers must not be unreasonably discriminatory.\546\
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\546\ See 15 U.S.C. 78k-1(c)(1)(D).
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The Commission requests comment on proposed Rules 614(d)(1)-(3). In
particular, the Commission solicits comment on the following:
96. Do these provisions reflect the main obligations of competing
consolidators? Should there be any other obligations?
97. Competing consolidators would be required to generate proposed
consolidated market data, which would include the calculation of an
NBBO consistent with the process outlined in the definition of NBBO in
Rule 600(b)(42). Do commenters believe that the definition of NBBO
would ensure the calculation of consistent NBBOs by competing
consolidators?
98. Do commenters believe that competing consolidators should be
required to develop a consolidated market data product that contains
all of the data elements provided under the proposed definition of
consolidated market data? Why or why not? Could there be some competing
consolidators that only offer a subset of the proposed consolidated
market data? Please explain.
Proposed Rule 614(d)(4) would require each competing consolidator
to timestamp the information collected in proposed Rule 614(d)(1): (i)
Upon receipt from each national securities exchange and national
securities association at the exchange's or association's data center;
(ii) upon receipt of such information at its aggregation mechanism; and
(iii) upon dissemination of consolidated market data to customers. The
Commission understands that the existing SIPs similarly timestamp
information in accordance with proposed Rule 614(d)(4)(i) and (iii).
The Commission preliminarily believes that the proposed rule is
appropriate because it would allow subscribers to ascertain a competing
consolidator's realized latency (i.e., how quickly the competing
consolidator can receive data from the exchanges, transmit that data
between the exchange's data center and its aggregation center, and
aggregate and disseminate proposed consolidated market data to
subscribers). This information provides transparency that should help
subscribers evaluate a potential competing consolidator or determine
whether an existing competing consolidator continues to meet their
needs.\547\
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\547\ If a competing consolidator uses a vendor to transmit data
between the SRO data center and the competing consolidator's data
center, the competing consolidator retains responsibility for
collecting all of the timestamps described in proposed Rule
614(d)(4).
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The Commission is also proposing several rules, described below,
that would require public disclosure of metrics and other information
concerning the performance and operations of a competing consolidator.
The information that the Commission is
[[Page 16783]]
proposing that competing consolidators publish is based upon
information that is currently produced by the CTA/CQ SIP and the Nasdaq
UTP SIP, either for public or internal distribution.\548\ Because this
information is useful to current users of the exclusive SIPs and
participants of the Equity Data Plans, the Commission preliminarily
believes that it should be made publicly available \549\ by competing
consolidators. The Commission preliminarily believes that public
disclosure and accessibility of this information would help market
participants to evaluate the merits of a competing consolidator by
providing transparency into the services and performance, and
resiliency of each competing consolidator, and could also lower search
costs for market participants and enhance competition. In addition, the
Commission preliminarily believes that the public disclosure of this
information--particularly the system availability and network delay
statistics and data quality and system issues--would help to ensure
that competing consolidators have a demonstrated ability to provide
consolidated market data in a stable and resilient manner.
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\548\ The exclusive SIPs currently publish to their respective
websites monthly processor metrics that provide the following
information: System availability, message rate and capacity
statistics, and the following latency statistics from the point of
receipt by the SIP to dissemination from the SIP: Average latency
and 10th, 90th and 99th percentile latency. See CTA Metrics,
available at https://www.ctaplan.com/metrics; UTP Metrics, available
at http://www.utpplan.com/metrics. Additionally, the exclusive SIPs
post on their websites any system alerts and the Nasdaq UTP Plan
posts vendor alerts as well. See CTA Alerts, available at https://www.ctaplan.com/alerts; UTP-SIP System Alerts, available at http://www.utpplan.com/system_alerts; UTP Vendor Alerts, available at
http://www.utpplan.com/vendor_alerts. Further, the exclusive SIPs
publish on their websites charts detailing realized latency from the
inception of a Participant matching engine event through the point
of dissemination from the exclusive SIP. See CTA Latency Charts,
available at https://www.ctaplan.com/latency-charts; UTP Realized
Latency Charting, available at http://www.utpplan.com/latency_charts.
\549\ Rule 600(b)(37) of Regulation NMS defines ``make publicly
available'' as ``posting on an internet website that is free and
readily accessible to the public, furnishing a written copy to
customers on request without charge, and notifying customers at
least annually in writing that a written copy will be furnished on
request.'' See 17 CFR 242.600(b)(37).
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Proposed Rule 614(d)(5) would require each competing consolidator
to publish prominently on its website, within 15 calendar days after
the end of each month, certain performance metrics. All information
posted pursuant to proposed Rule 614(d)(5) must be publicly posted in
downloadable files and must remain free and accessible (without any
encumbrances or restrictions) by the general public on the website for
a period of not less than three years from the initial date of posting.
The Commission preliminarily believes that the availability of this
information on a website (without any encumbrances or restrictions)
would assist market participants in comparing competing consolidators
and evaluating their performance over time.\550\ In particular,
proposed Rule 614(d)(5) would provide that the performance metrics
include: (i) Capacity statistics (such as system tested capacity,
system output capacity, total transaction capacity, and total
transaction peak capacity); (ii) message rate and total statistics
(such as peak output rates on the following bases: 1-millisecond, 10-
millisecond, 100-millisecond, 500-millisecond, 1-second, and 5-second);
(iii) system availability statistics (for example, whether system up-
time has been 100% for the month and cumulative amount of outage time);
(iv) network delay statistics (for example, today under a TCP-IP
network, network delay statistics would include quote and trade zero
window size events, quote and trade TCP retransmit events, and quote
and trade message total); and (v) latency statistics (with distribution
statistics up to the 99.99th percentile) for (1) when a national
securities exchange or national securities association sends an inbound
message to a competing consolidator network and when the competing
consolidator network receives the inbound message; \551\ (2) when the
competing consolidator network receives the inbound message and when
the competing consolidator network sends the corresponding consolidated
message to a subscriber; and (3) when a national securities exchange or
national securities association sends an inbound message to a competing
consolidator network and when the competing consolidator network sends
the corresponding consolidated message to a subscriber.
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\550\ A competing consolidator that ceases operations would not
be required to maintain the information posted pursuant to proposed
Rule 614(d)(5) after the competing consolidator files its notice of
cessation and its Form CC becomes ineffective, as provided in
proposed Rule 614(a)(3).
\551\ The Commission believes that the SIPs do not currently
produce this latency statistic.
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Additionally, proposed Rule 614(d)(6) would require each competing
consolidator to publish prominently on its website, within 15 calendar
days after the end of each month, information on: (i) Data quality
issues (such as delayed message publication, publication of duplicative
messages, and message inaccuracies); (ii) system issues (such as
processing, connectivity, and hardware problems); (iii) any clock
synchronization protocol utilized; (iv) for the clocks used to generate
the timestamps described in Rule 614(d)(4), clock drift averages and
peaks and number of instances of clock drift greater than 100
microseconds; \552\ and (v) vendor alerts (such as holiday reminders
and testing dates). All information posted pursuant to proposed Rule
614(d)(6) must be publicly posted and must remain free and accessible
(without any encumbrances or restrictions) by the general public on the
website for a period of not less than three years from the initial date
of posting.
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\552\ The Commission believes that the SIPs do not currently
produce this information.
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The Commission requests comment on proposed Rules 614(d)(4)-(d)(6).
In particular, the Commission solicits comment on the following:
99. Do commenters believe that separate timestamps should be
required as described in Rule 614(d)(4)? Are these the relevant
instances for timestamps? Should any other timestamps be adopted?
Should any of the proposed timestamps not be required?
100. Do commenters believe that the information required to be
published pursuant to proposed Rule 614(d)(5) and proposed Rule
614(d)(6) is appropriate for competing consolidators? Should any
further information be published? Is any information proposed to be
published unnecessary?
101. Do commenters believe that the frequency of publication of the
information required to be published pursuant to proposed Rule
614(d)(5) and proposed Rule 614(d)(6) is sufficient? Is it too onerous?
102. Do commenters believe that requiring each competing
consolidator to publish the data required by proposed Rule 614(d)(5)
and proposed Rule 614(d)(6) on its respective website is appropriate?
Would commenters prefer that the competing consolidators instead file
the data with the Commission for publication on the Commission's
website?
103. Do commenters believes that any of the information required to
be published on the competing consolidator's website should not be
required to be made publicly available? Please explain. If so, should
this information be required to be provided to subscribers? Should any
information proposed to be made publicly available not be made publicly
available due to competitive concerns? If so, please
[[Page 16784]]
identify the information and provide an explanation.
104. Do commenters believe a requirement for the competing
consolidators to publish historical performance data should be included
in proposed Rule 614(d)(5) and proposed Rule 614(d)(6)? If yes, for
what time periods should historical data be required to be published?
The Commission is proposing several rules that would require
competing consolidators to provide and maintain information for
regulatory purposes. Proposed Rule 614(d)(7) would require each
competing consolidator to keep and preserve at least one copy of all
documents, including all correspondence, memoranda, papers, books,
notices, accounts, and such other records as shall be made or received
by it in the course of its business as such and in the conduct of its
business.\553\ The proposed rule would require competing consolidators
to keep these documents for a period of no less than five years, the
first two years in an easily accessible place. Proposed Rule 614(d)(8)
would require each competing consolidator to, upon request of any
representative of the Commission, promptly furnish to the possession of
such representative copies of any documents required to be kept and
preserved by it.\554\ These requirements would facilitate the
Commission's oversight of competing consolidators and the national
market system.
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\553\ See Section 17(a)(1) of the Exchange Act, 15 U.S.C.
78q(a)(1).
\554\ In this context, ``promptly'' or ``prompt'' means making
reasonable efforts to produce records that are requested by the
staff during an examination without delay. The Commission believes
that in many cases a competing consolidator could, and therefore
will be required to, furnish records immediately or within a few
hours of a request. The Commission expects that only in unusual
circumstances would a competing consolidator be permitted to delay
furnishing records for more than 24 hours. Accord Regulation
Crowdfunding, Securities Act Release No. 9974, Securities Exchange
Act Release No. 76324 (Oct. 30, 2015), 80 FR 71387, 71473 n. 1122
(Nov. 15, 2015) (similarly interpreting the term ``promptly'' in the
context of Regulation Crowdfunding Rule 404(e)); Security Based Swap
Data Repository Registration, Duties, and Core Principles,
Securities Exchange Act Release No. 74246 (Feb. 11, 2015), 80 FR
14438, 14500, n. 846 (March 19, 2015) (similarly interpreting the
term ``promptly'' in the context of Exchange Act Rule 13n-7(b)(3));
Registration of Municipal Advisors, Securities Exchange Act Release
No. 70462 (Sept. 20, 2013), 78 FR 67468, 67578-67579 n. 1347 (Nov.
12, 2013) (similarly interpreting the term ``prompt'' in the context
of Exchange Act Rule 15Ba1-8(d)).
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The Commission requests comment on proposed Rules 614(d)(7) and
(d)(8). In particular, the Commission solicits comment on the
following:
105. Do commenters believe that the documents required to be kept
and preserved by proposed Rule 614(d)(7) are appropriate for competing
consolidators? If not, please explain. Are there any other documents
that should be kept and preserved by competing consolidators?
106. Do commenters believe that the recordkeeping time periods
required by proposed Rule 614(d)(7) are appropriate for competing
consolidators? If not, what would be more appropriate recordkeeping
time periods?
107. Do commenters believe that proposed Rule 614(d)(8), which
requires competing consolidators to provide copies of any documents
required to be kept and preserved to any representative of the
Commission upon request, is appropriate for competing consolidators? If
not, please explain.
The Commission is proposing to define ``business day'' for purposes
of proposed Rule 614 to comport with provisions contained in Rule 19b-4
and to specify the conditions under which filings required pursuant to
Rule 614 are deemed to have been made on a particular business day.
Specifically, the Commission proposes to define ``business day'' in the
same manner in which it is defined in Rule 19b-4(b)(2).\555\ The
Commission preliminarily believes that these provisions providing a
date-of-filings standard would facilitate the ability of competing
consolidators to comply with the requirements of Rule 614 and
facilitate the ability of the Commission to effectively receive,
review, and make public the filings required under proposed Rule 614.
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\555\ See Rule 19b-4(b)(2), 17 CFR 240.19b-4(b)(2).
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The Commission requests comment on proposed Rules 614(a)(4)(i) and
(a)(4)(ii). In particular, the Commission solicits comment on the
following:
108. Do commenters believe that the definition of business day in
proposed Rule 614(a)(4)(i) is appropriate? Why or why not? Would any
alternative definition of business day be preferable? Please explain.
109. Do commenters believe that the standards set forth in proposed
Rule 614(a)(4)(ii) regarding when a filing or publication requirement
is deemed to have occurred on a particular business day are
appropriate? Why or why not? Would any alternative standards be
preferable? Please explain.
(iii) Proposed New Form CC
Proposed new Form CC includes a set of instructions for its
completion and submission. These instructions are attached to this
release, together with proposed Form CC. Proposed Form CC would require
competing consolidators\556\ to provide information and/or reports in
narrative form by attaching specified exhibits. The proposed form would
require a competing consolidator to indicate the purpose for which it
is filing the form (i.e., initial report, material amendment, annual
amendment, or notice of cessation), and to provide information in four
categories: (1) General information, along with contact information;
(2) business organization; (3) operational capability; and (4) services
and fees. The Commission preliminarily believes that it is necessary to
obtain the information requested in proposed Form CC to enable the
Commission to determine whether to declare a Form CC ineffective.
Specifically, the Commission believes that the requested information
would assist the Commission in understanding the competing
consolidator's overall business structure, technological reliability,
and services offered. In addition, Form CC would help to provide for
consistent disclosures among competing consolidators.
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\556\ As explained above, only non-exclusive SIP competing
consolidators, and not SRO competing consolidators, would be
required to register on Form CC.
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General Information: Proposed Form CC would require a competing
consolidator to provide its legal name and ``DBA'' (doing business as),
if applicable, its address, website URL, legal status (e.g.,
corporation, partnership, and sole proprietorship), and, except in the
case of a sole proprietorship, the date of formation and state or
country in which it was formed. The Commission preliminarily believes
that this basic information is necessary for the Commission to evaluate
a competing consolidator. Proposed Form CC also would require the
competing consolidator to indicate (1) whether it is registered as a
broker-dealer or affiliated with a registered broker-dealer and (2)
whether it is a successor to a previously registered competing
consolidator and, if so, the date of succession and the name and
address of the predecessor registrant. The Commission preliminarily
believes that this would provide basic identifying information about
the competing consolidator and assist the Commission in its review of
Form CC.
Business Organization: Proposed Form CC would require each
competing consolidator to provide information regarding its business
organization, including: (1) In Exhibit A, information regarding any
person who owns 10 percent or more of the competing
[[Page 16785]]
consolidator's stock or who, either directly or indirectly, through
agreement or otherwise, in any other manner, may control or direct the
competing consolidator's management or policies, including the full
name and title of any such person and a copy of the agreement, or if
there is no written agreement, a description of the agreement or basis
upon which such person may exercise such control or direction; (2) in
Exhibit B, a list of the officers, directors, governors, or persons
performing similar functions of the competing consolidator; (3) in
Exhibit C, a narrative or graphic description of the competing
consolidator's organizational structure; and (4) in Exhibit D, a list
of all affiliates of the competing consolidator and the general nature
of the affiliations. The Commission preliminarily believes that
obtaining this information would assist the Commission in understanding
the competing consolidator's overall business structure, governance
arrangements, and operations, all of which would assist the Commission
in its review of Form CC. If the competing consolidator is a broker-
dealer, or is affiliated with a broker-dealer, proposed Form CC would
permit the competing consolidator to attach its, or its affiliate's,
Schedule A of Form BD, relating to direct owners and executive
officers, and Schedule B of Form BD, relating to indirect owners.
Alternatively, in lieu of filing Exhibits A and B to proposed Form CC,
or providing Schedules A and B of Form BD, proposed Form CC would
permit a competing consolidator to provide a URL address where the
information requested under Exhibits A and B to proposed Form CC are
available. The Commission preliminarily believes that this information
would help the Commission and market participants understand the
persons and entities that directly and indirectly own the broker-
dealer, thereby enabling the Commission and market participants to
better understand potential conflicts of interest that may arise for a
competing consolidator that is a broker-dealer or is affiliated with a
broker-dealer.
Operational Capability: Proposed Form CC would require each
competing consolidator to provide a description of each proposed
consolidated market data service or function, including connectivity
and delivery options for subscribers, and a description of all
procedures utilized for the collection, processing, distribution,
publication, and retention of information with respect to quotations
for, and transactions in, securities. The Commission further believes,
preliminarily, that this information could assist the Commission in
overseeing competing consolidators and assist market participants in
assessing whether to become a subscriber of a certain competing
consolidator. Competing consolidators could serve an important role in
the national market system by calculating and generating consolidated
market data, as proposed, and, accordingly, it is important for the
competing consolidator to provide the requested information relating to
its operational capability.
Services and Fees: Proposed Form CC would further require a
competing consolidator to provide information regarding access to its
competing consolidator services, including: (1) A description of all
market data products with respect to proposed consolidated market data
or any subset of proposed consolidated market data that are provided to
subscribers; (2) a description of any fees or charges for use of the
competing consolidator with respect to proposed consolidated market
data or any subset of proposed consolidated market data, including the
types of fees (e.g., subscription and connectivity), the structure of
the fee (e.g., fixed and variable), variables that affect the fees
(e.g., data center costs, aggregation costs, and transmission costs),
pricing differentiation among the types of subscribers, and range of
fees (high and low); (3) a description of any co-location,
connectivity, and related services, and the terms and conditions for
co-location and related services, including connectivity and throughput
options offered; and (4) a description of any other means besides co-
location and related services to increase the speed of communication,
including a summary of the terms and conditions for its use. The
Commission preliminarily believes that this information would assist
market participants in determining whether to become a subscriber of a
competing consolidator by requiring the availability to all market
participants of information regarding the services offered by the
competing consolidator and the fees it charges for services and
proposed consolidated market data. The availability of this information
would also help to assure that all subscribers and potential
subscribers have the same information about the services that the
competing consolidator offers.
Contact Information: In addition to the foregoing, proposed Form CC
would require a competing consolidator to provide Commission staff with
point of contact information for a person(s) prepared to respond to
questions regarding Form CC, including the name, title, telephone
number, and email address of such person. Proposed Form CC also would
require an electronic signature to help ensure the authenticity of the
Form CC submission. The Commission preliminarily believes these
proposed requirements would expedite communications between Commission
staff and a competing consolidator and help to ensure that only
personnel authorized by the competing consolidator are submitting
required filings and responding to questions from Commission staff
regarding Form CC.
The Commission requests comment on proposed Form CC. In particular,
the Commission solicits comment on the following:
110. Are the instructions in proposed Form CC sufficiently clear?
If not, identify any instructions that should be clarified, and, if
possible, offer alternatives.
111. Should the Commission implement an electronic filing system
for receipt of Form CC, and, if so, what particular features should be
incorporated into the system? Are there any burdens associated with the
electronic filing of proposed Form CC that the Commission should
consider?
112. Is the requested information relating to a competing
consolidator's operational capability appropriate? If not, identify any
items that are not appropriate, explain why, and, if possible, offer
alternatives.
113. Is the requested information relating to access to a competing
consolidator's services appropriate? If not, identify any items that
are not appropriate, explain why, and, if possible, offer alternatives.
114. Do commenters believe that competing consolidators will bundle
their products and/or services? If so, should this be disclosed on Form
CC?
115. Should the Commission require any additional information on
Form CC? If so, what information and why?
116. Are there any items on proposed Form CC that the Commission
should not request? If so, which items and why?
(f) Amendments to Regulation SCI
The Commission adopted Regulation SCI in November 2014 to
strengthen the technology infrastructure of the U.S. securities
markets.\557\ Regulation SCI is designed to reduce the occurrence of
systems issues in the U.S. securities markets, improve resiliency when
systems problems occur, and enhance
[[Page 16786]]
the Commission's oversight of securities market technology
infrastructure. The key market participants that are currently subject
to Regulation SCI are called ``SCI entities'' and include certain SROs
(including stock and options exchanges, registered clearing agencies,
FINRA and the Municipal Securities Regulatory Board) (``SCI SROs'');
alternative trading systems that trade NMS and non-NMS stocks exceeding
specified volume thresholds (``SCI ATSs''); the exclusive SIPs (``plan
processors''); and certain exempt clearing agencies.\558\ Regulation
SCI, among other things, requires these SCI entities to establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that their key automated systems have levels of
capacity, integrity, resiliency, availability, and security adequate to
maintain their operational capability and promote the maintenance of
fair and orderly markets, and that such systems operate in accordance
with the Exchange Act and the rules and regulations thereunder and the
entities' rules and governing documents, as applicable.\559\ Broadly
speaking, Regulation SCI also requires SCI entities to take appropriate
corrective action when systems issues occur; provide certain
notifications and reports to the Commission regarding systems problems
and systems changes; inform members and participants about systems
issues; conduct business continuity and disaster recovery testing and
penetration testing; conduct annual reviews of their automated systems;
and make and keep certain books and records.\560\
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\557\ See Regulation SCI Adopting Release, supra note 28, at
72252-56 for a discussion of the background of Regulation SCI.
\558\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000. Because
self-aggregators would be broker-dealers, see infra Section IV.B.3,
they would be subject to existing broker-dealer risk control and
supervisory obligations. See, e.g., 17 CFR 240.15c3-5, FINRA Rule
3110, FINRA Rule 4370, FINRA Rule 4380.
\559\ See Rule 1001 of Regulation SCI, 17 CFR 242.1001, which is
also discussed further below.
\560\ See Rules 1002-1007 of Regulation SCI, 17 CFR 242.1001-
1007, which are also discussed further below.
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Regulation SCI applies primarily to the systems of, or operated on
behalf of, SCI entities that directly support any one of six key
securities market functions--trading, clearance and settlement, order
routing, market data, market regulation, and market surveillance (``SCI
systems'').\561\ With respect to security, Regulation SCI also applies
to systems that, if breached, would be reasonably likely to pose a
security threat to SCI systems (``indirect SCI systems'').\562\ In
addition, certain systems that raise concerns about single points of
failure (defined as ``critical SCI systems'') are subject to certain
heightened requirements.\563\
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\561\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000.
\562\ Id.
\563\ Id. Subparagraph (1) of the definition of ``critical SCI
systems'' in Rule 1000 of Regulation SCI specifically enumerates
certain systems to be within its scope, including those that
``directly support functionality relating to: (i) Clearance and
settlement systems of clearing agencies; (ii) openings, reopenings,
and closings on the primary listing market; (iii) trading halts;(iv)
initial public offerings; (v) the provision of consolidated market
data; or (vi) exclusively-listed securities . . .''.
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When adopting Regulation SCI, the Commission included within the
scope of Regulation SCI those entities ``that play a significant role
in the U.S. securities markets and/or have the potential to impact
investors, the overall market, or the trading of individual
securities.'' \564\ The Commission identified by function the key
market participants it believed were integral to ensuring the
stability, integrity, and resiliency of securities market
infrastructure.\565\ As discussed below, ``plan processors'' are
currently among those entities that are subject to Regulation SCI.
Under Regulation SCI, ``plan processors'' have the meaning set forth in
Regulation NMS.\566\ Thus, currently, the exclusive SIPs, or plan
processors of the Equity Data Plans and the OPRA Plan, are subject to
Regulation SCI.\567\ The Commission included plan processors within the
scope of Regulation SCI because the Commission believed that such
entities, because they are exclusive processors and providers of key
market data pursuant to a national market system plan, are central
features of the national market system and serve an important role
within the national market system in operating and maintaining computer
and communications facilities for the receipt, processing, validating,
and dissemination of quotation and/or last sale price information.\568\
---------------------------------------------------------------------------
\564\ See Regulation SCI Adopting Release, supra note 28, at
72258.
\565\ Id. at 72254.
\566\ See Rule 600(b)(59) of Regulation NMS, 17 CFR
242.600(b)(59).
\567\ See also Regulation SCI Adopting Release, supra note 28,
at 72270-71, n. 196 (discussing how the term ``plan processor''
applies to the CTA, CQ, Nasdaq UTP, and OPRA plans).
\568\ See also id. at 72271. The Commission also stated how
systems issues affecting SIPs highlighted their importance within
the national market system. See id. at n. 199 (discussing the impact
of two systems issues involving SIPs).
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The Commission preliminarily believes that competing consolidators,
because they would be sources of consolidated market data, even if not
exclusive sources of such data, would similarly serve an important role
in the national market system, and therefore should be subject to the
requirements of Regulation SCI. When adopting Regulation SCI, the
Commission explained that Regulation SCI would apply not only to
exclusive providers of consolidated market data, but also to the market
data systems of SCI SROs, stating, ``both consolidated and proprietary
market data systems are widely used and relied upon by a broad array of
market participants, including institutional investors, to make trading
decisions, and [] if a consolidated or a proprietary market data feed
became unavailable or otherwise unreliable, it could have a significant
impact on the trading of the securities to which it pertains, and could
interfere with the maintenance of fair and orderly markets.'' \569\ The
Commission preliminarily believes that if a consolidated market data
feed of a competing consolidator became unavailable or otherwise
unreliable, it could have a significant impact on the trading of NMS
stocks and/or the market participants subscribing to its data feeds,
and could possibly interfere with the maintenance of fair and orderly
markets. A systems issue could occur at a competing consolidator (e.g.,
a systems disruption that prevented the competing consolidator from
disseminating consolidated market data to its subscribers, a systems
intrusion that impacted the quality of the data being disseminated, or
another cybersecurity incident, such that certain market participants
or the securities markets broadly could be significantly impacted until
such time that the issue was resolved at the competing consolidator, or
the end user (or its market data vendor, if applicable) was able to
implement any backup arrangements with an alternative competing
consolidator. As detailed further below, the Commission is requesting
comment on whether all of the obligations set forth in Regulation SCI
should apply to competing consolidators, or whether only certain
requirements should be imposed, such as those requiring written
policies and procedures, notification of systems problems, business
continuity and disaster recovery testing (including testing with
participants/subscribers of a competing consolidator), and penetration
testing.
---------------------------------------------------------------------------
\569\ See Regulation SCI Adopting Release, supra note 28, at
72275.
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In addition, the Commission is proposing to revise the definition
of ``critical SCI system,'' to take account of competing consolidators,
which, as proposed, would not be exclusive providers of consolidated
market data. Currently, subparagraph (1)(v) of the
[[Page 16787]]
definition of ``critical SCI systems'' includes those SCI systems of,
or operated on behalf of, an SCI entity that directly support
functionality relating to ``the provision of consolidated market
data.'' The Commission is proposing to revise this subparagraph to
apply to those systems that directly support functionality relating to
``the provision of market data by a plan processor.'' The proposed
revised language in subparagraph (1)(v) is intended to identify as
critical SCI systems only those market data systems that perform an
exclusive market data dissemination function pursuant to an NMS plan.
Accordingly, the scope of ``critical SCI systems'' would still capture
single points of failure within the national market system. Under the
current consolidation model, because the exclusive SIPs represent such
single points of failure, they are all subject to heightened
requirements as ``critical SCI systems.'' However, because the
competing consolidator model is designed to result in multiple viable
sources of consolidated market data, and would not be initiated until a
transition period was complete,\570\ the Commission preliminarily
believes that including systems of such competing consolidators within
the scope of ``critical SCI systems'' would not be necessary. With
multiple competing consolidators operating in the national market
system, the systems of competing consolidators would be subject to the
standard (i.e., as SCI systems that are not critical SCI systems)
requirements of Regulation SCI, whereas the proposed revised definition
of ``critical SCI systems'' would address single point of failure
concerns.
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\570\ See infra Section IV.B.6.
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Because the competing consolidator model would not apply with
respect to trading in options, the definition of ``critical SCI
systems'' must still account for the systems of OPRA's plan processor,
whose systems would continue to be ``critical SCI systems.'' In
addition, to avoid confusion with the term ``consolidated market
data''--which is proposed to be defined to include (1) core data, (2)
regulatory data, (3) administrative data, (4) exchange-specific program
data, and (5) additional regulatory, administrative, or exchange-
specific program data elements defined as such pursuant to the
effective national market system plan(s) required under Rule 603(b)
\571\--the Commission is proposing to replace that phrase within the
definition of ``critical SCI systems'' with ``market data.'' \572\
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\571\ See proposed Rule 600(b)(19) of Regulation NMS. See also
supra Section III.B.
\572\ See proposed amendment to Rule 1000 of Regulation SCI.
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Thus, under this proposal, the definition of ``SCI entities'' would
be expanded to include ``competing consolidators,'' which would be
defined to have the same meaning as the definition of ``competing
consolidators'' set forth in proposed Rule 600(b)(16) of Regulation
NMS.\573\ Competing consolidators would be subject to the requirements
of Regulation SCI, as described below.
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\573\ See proposed amendment to Rule 1000 of Regulation SCI. As
discussed above, competing consolidators would not fall within the
definition of ``plan processors'' under Regulation SCI. See supra
notes 566-567 and accompanying text. In addition to revising Rule
1000 of Regulation SCI to define ``competing consolidators'' and
include them within the definition of ``SCI entity,'' corresponding
changes would be made to Form SCI and the General Instructions to
Form SCI to include references to ``competing consolidators.'' See
infra note 595 and accompanying text (discussing Form SCI and Rule
1006 of Regulation SCI).
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Rule 1001(a) of Regulation SCI requires SCI entities to have
policies and procedures reasonably designed to ensure that their SCI
systems and, for purposes of security standards, indirect SCI systems,
have levels of capacity, integrity, resiliency, availability, and
security adequate to maintain their operational capability and promote
the maintenance of fair and orderly markets, and includes certain
minimum requirements for those policies and procedures relating to
capacity planning, stress tests, systems development and testing
methodology, the identification of vulnerabilities, business continuity
and disaster recovery plans (including geographic diversity and
resumption goals), and monitoring.\574\ Of particular note for
competing consolidators is Rule 1001(a)(2)(vi), which requires that an
SCI entity's policies and procedures include standards ``that result in
such systems being designed, developed, tested, maintained, operated,
and surveilled in a manner that facilitates the successful collection,
processing, and dissemination of market data.'' \575\ Rule 1001(a)(3)
of Regulation SCI requires that SCI entities periodically review the
effectiveness of these policies and procedures, and take prompt action
to remedy any deficiencies.\576\ Rule 1001(a)(4) of Regulation SCI
provides that, for purposes of the provisions of Rule 1001(a), an SCI
entity's policies and procedures will be deemed to be reasonably
designed if they are consistent with current SCI industry standards,
which shall be comprised of information technology practices that are
widely available to information technology professionals in the
financial sector and issued by an authoritative body that is a U.S.
governmental entity or agency, association of U.S. governmental
entities or agencies, or widely recognized organization; \577\ however,
Rule 1001(a)(4) of Regulation SCI also makes clear that compliance with
such ``current SCI industry standards'' are not the exclusive means to
comply with these requirements.
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\574\ Rule 1001(a) of Regulation SCI, 17 CFR 242.1001(a).
\575\ Rule 1001(a)(2)(vi) of Regulation SCI, 17 CFR
242.1001(a)(2)(vi).
\576\ Rule 1001(a)(3) of Regulation SCI, 17 CFR 242.1001(a)(3).
\577\ Rule 1001(a)(4) of Regulation SCI, 17 CFR 242.1001(a)(4).
We note that concurrent with the Commission's adoption of Regulation
SCI, Commission staff issued staff guidance on current SCI industry
standards as referenced in Regulation SCI. The staff guidance listed
examples of publications in nine domains describing processes,
guidelines, frameworks, or standards an SCI entity could look to in
developing reasonable policies and procedures to comply with Rule
1001(a) of Regulation SCI. See ``Staff Guidance on Current SCI
Industry Standards,'' November 19, 2014, available at: https://www.sec.gov/rules/final/2014/staff-guidance-current-sci-industry-standards.pdf. The domains included: Application controls; capacity
planning; computer operations and production environment controls;
contingency planning; information security and networking; audit;
outsourcing; physical security; and systems development methodology.
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Rule 1001(b) of Regulation SCI requires that each SCI entity
establish, maintain, and enforce written policies and procedures
reasonably designed to ensure that its SCI systems operate in a manner
that complies with the Act and the rules and regulations thereunder and
the entity's rules and governing documents, as applicable, and
specifies certain minimum requirements for such policies and
procedures.\578\ Rule 1001(b)(3) of Regulation SCI requires that SCI
entities periodically review the effectiveness of these policies and
procedures, and take prompt action to remedy any deficiencies.\579\
Rule 1001(b)(4) of Regulation SCI provides individuals with a safe
harbor from liability under Rule 1001(b) if certain conditions are
met.\580\
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\578\ Rule 1001(b)(1)-(2) of Regulation SCI, 17 CFR
242.1001(b)(1)-(2).
\579\ Rule 1001(b)(3) of Regulation SCI, 17 CFR 242.1001(b)(3).
\580\ Rule 1001(b)(4) of Regulation SCI, 17 CFR 242.1001(b)(4).
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Rule 1001(c) of Regulation SCI requires SCI entities to establish,
maintain, and enforce reasonably designed written policies and
procedures that include the criteria for identifying responsible SCI
personnel, the designation and documentation of responsible SCI
personnel, and
[[Page 16788]]
escalation procedures to quickly inform responsible SCI personnel of
potential SCI events.\581\ Rule 1000 of Regulation SCI defines
``responsible SCI personnel'' to mean, ``for a particular SCI system or
indirect SCI system impacted by an SCI event, such senior manager(s) of
the SCI entity having responsibility for such system, and their
designee(s).'' \582\ Rule 1000 also defines ``SCI event'' to mean an
event at an SCI entity that constitutes a system disruption, a systems
compliance issue, or a systems intrusion.\583\ Rule 1001(c)(2) of
Regulation SCI requires that SCI entities periodically review the
effectiveness of these policies and procedures, and take prompt action
to remedy any deficiencies.\584\
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\581\ Rule 1001(c) of Regulation SCI, 17 CFR 242.1001(c).
\582\ Rule 1000 of Regulation SCI, 17 CFR 242.1000.
\583\ A ``systems disruption'' means an event in an SCI entity's
SCI systems that disrupts, or significantly degrades, the normal
operation of an SCI system. A ``systems compliance issue'' means
``an event at an SCI entity that has caused any SCI system of such
entity to operate in a manner that does not comply with the Act and
the rules and regulations thereunder or the entity's rules or
governing documents, as applicable.'' A ``systems intrusion'' means
any unauthorized entry into the SCI systems or indirect SCI systems
of an SCI entity.'' See Rule 1000 of Regulation SCI, 17 CFR
242.1000.
\584\ Rule 1001(c)(2) of Regulation SCI, 17 CFR 242.1001(c)(2).
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Under Rule 1002 of Regulation SCI, SCI entities have certain
obligations related to SCI events. Specifically, when any responsible
SCI personnel has a reasonable basis to conclude that an SCI event has
occurred, an SCI entity must begin to take appropriate corrective
action which must include, at a minimum, mitigating potential harm to
investors and market integrity resulting from the SCI event and
devoting adequate resources to remedy the SCI event as soon as
reasonably practicable.\585\ Rule 1002(b) provides the framework for
notifying the Commission of SCI events including, among other things,
to: Immediately notify the Commission of the event; provide a written
notification within 24 hours that includes a description of the SCI
event and the system(s) affected, with other information required to
the extent available at the time; provide regular updates regarding the
SCI event until the event is resolved; and submit a final detailed
written report regarding the SCI event.\586\ Rule 1002(c) of Regulation
SCI also requires that SCI entities disseminate information to their
members or participants regarding SCI events.\587\ These information
dissemination requirements are scaled based on the nature and severity
of an event. Specifically, for ``major SCI events,'' SCI entities are
required to promptly disseminate certain information about the event to
all of its members or participants. For SCI events that are not ``major
SCI events,'' SCI entities must, promptly after any responsible SCI
personnel has a reasonable basis to conclude that an SCI has occurred,
disseminate certain information to those SCI entity members and
participants reasonably estimated to have been affected by the event.
In addition, dissemination of information to members or participants is
permitted to be delayed for systems intrusions if such dissemination
would likely compromise the security of the SCI entity's systems or an
investigation of the intrusion.\588\
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\585\ See Rule 1002(a) of Regulation SCI, 17 CFR 242.1002(a).
\586\ See Rule 1002(b) of Regulation SCI, 17 CFR 242.1002(b).
For any SCI event that ``has had, or the SCI entity reasonably
estimates would have, no or a de minimis impact on the SCI entity's
operations or on market participants,'' Rule 1002(b)(5) provides an
exception to the general Commission notification requirements under
Rule 1002(b). Instead, an SCI entity must make, keep, and preserve
records relating to all such SCI events, and submit a quarterly
report to the Commission regarding any such events that are systems
disruptions or systems intrusions.
\587\ See Rule 1002(c) of Regulation SCI, 17 CFR 242.1002(c).
\588\ See Rule 1002(c)(2) of Regulation SCI, 17 CFR
242.1002(c)(2). In addition, the information dissemination
requirements of Rule 1002(c) do not apply to SCI events to the
extent they relate to market regulation or market surveillance
systems, or to any SCI event that has had, or the SCI entity
reasonably estimates would have, no or a de minimis impact on the
SCI entity's operations or on market participants. See Rule
1002(c)(4) of Regulation SCI, 17 CFR 242.1002(c)(4).
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Rule 1003(a) of Regulation SCI requires SCI entities to provide
reports to the Commission relating to system changes, including a
report each quarter describing completed, ongoing, and planned material
changes to their SCI systems and the security of indirect SCI systems,
during the prior, current, and subsequent calendar quarters, including
the dates or expected dates of commencement and completion.\589\ Rule
1003(b) of Regulation SCI also requires that an SCI entity conduct an
``SCI review'' not less than once each calendar year.\590\ ``SCI
review'' is defined in Rule 1000 of Regulation SCI to mean a review,
following established procedures and standards, that is performed by
objective personnel having appropriate experience to conduct reviews of
SCI systems and indirect SCI systems, and which review contains: A risk
assessment with respect to such systems of an SCI entity; and an
assessment of internal control design and effectiveness of its SCI
systems and indirect SCI systems to include logical and physical
security controls, development processes, and information technology
governance, consistent with industry standards.\591\ Rule 1003(b)(2)-
(3) SCI entities are also required to submit a report of the SCI review
to their senior management, and must also submit the report and any
response by senior management to the report, to their board of
directors as well as the Commission.\592\
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\589\ See Rule 1003(a) of Regulation SCI, 17 CFR 242.1003(a).
\590\ See Rule 1003(b) of Regulation SCI, 17 CFR 242.1003(b).
\591\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000. In
addition, Rule 1003(b)(1) of Regulation SCI states that penetration
test reviews of an SCI entity's network, firewalls, and production
systems must be conducted at a frequency of not less than once every
three years, and assessments of SCI systems directly supporting
market regulation or market surveillance must be conducted at a
frequency based upon the risk assessment conducted as part of the
SCI review, but in no case less than once every three years. See
Rule 1003(b)(1)(i)-(ii) of Regulation SCI, 17 CFR 242.1003(b)(1)(i)-
(ii).
\592\ See Rule 1003(b)(2)-(3) of Regulation SCI, 17 CFR
242.1003(b)(2)-(3).
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Rule 1004 of Regulation SCI sets forth the requirements for testing
an SCI entity's business continuity and disaster recovery plans with
its members or participants. This rule requires that, with respect to
an SCI entity's business continuity and disaster recovery plan,
including its backup systems, each SCI entity shall: (a) Establish
standards for the designation of those members or participants that the
SCI entity reasonably determines are, taken as a whole, the minimum
necessary for the maintenance of fair and orderly markets in the event
of the activation of such plans; \593\ (b) designate members or
participants pursuant to the standards established and require
participation by such designated members or participants in scheduled
functional and performance testing of the operation of such plans, in
the manner and frequency specified by the SCI entity, provided that
such frequency shall not be less than once every 12 months; and (c)
coordinate the testing of such plans on an industry- or sector-wide
basis with other SCI entities.
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\593\ See Rule 1004 of Regulation SCI, 17 CFR 242.1004. For a
competing consolidator, its designated members or participants
generally would include the national securities exchanges that
receive its consolidated market data, as well as its other
significant subscribers for such data (including, but not limited,
to major market data vendors that widely redistribute such data).
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Rule 1005(b) of Regulation SCI relates to the recordkeeping
requirements of competing consolidators related to compliance with
Regulation SCI.\594\
[[Page 16789]]
Rule 1006 of Regulation SCI provides for certain requirements relating
to the electronic filing, on Form SCI, of any notification, review,
description, analysis, or report to the Commission required to be
submitted under Regulation SCI.\595\ Finally, Rule 1007 of Regulation
SCI contains requirements relating to a written undertaking when
records required to be filed or kept by an SCI entity under Regulation
SCI are prepared or maintained by a service bureau or other
recordkeeping service on behalf of the SCI entity.\596\
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\594\ See Rule 1005 of Regulation SCI, 17 CFR 242.1005. Rule
1005(a) relates to recordkeeping provisions for SCI SROs, whereas
Rule 1005(b) relates to the recordkeeping provision for SCI entities
other than SCI SROs.
\595\ See Rule 1006 of Regulation SCI, 17 CFR 242.1006.
\596\ See Rule 1007 of Regulation SCI, 17 CFR 242.1007.
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The Commission requests comment on the proposed inclusion of
competing consolidators in Regulation SCI and the related revisions to
Rule 1000 of Regulation SCI. In particular, the Commission solicits
comment on the following:
117. Do commenters believe that Regulation SCI should apply to
competing consolidators? If so, do commenters believe that the proposed
revisions to Rule 1000 of Regulation SCI are appropriate? Why or why
not? Is there a potential for a systems issue at a competing
consolidator to have an adverse impact on the maintenance of fair and
orderly markets? If so, what do commenters believe would be the most
effective way to mitigate that potential?
118. Do commenters believe that competing consolidators could play
a significant role in the U.S. securities markets such that they should
be defined as SCI entities? Why or why not? What do commenters believe
are the risks related to subscribers associated with systems issues at
a competing consolidator? What impact would a systems issue have on the
trading of securities and the maintenance of fair and orderly markets?
Do commenters believe that all requirements set forth in Regulation SCI
should apply to competing consolidators? Why or why not?
119. Unlike other types of SCI entities, ATSs are only subject to
Regulation SCI if they meet certain volume thresholds set forth in the
definition of ``SCI ATS.'' Do commenters similarly believe there is a
threshold size, or a threshold for significant market share, at which
Regulation SCI should apply to a competing consolidator? For example,
the definition of SCI ATSs contains a two-pronged volume threshold test
measured over a ``four out of six-month'' period to determine whether
an alternative trading system is subject to Regulation SCI. Would a
similar test be appropriate for competing consolidators? If so, what do
commenters believe would be an appropriate measurement that should be
used for such a test? For example, in the definition of SCI ATS, the
NMS stock volume threshold test for inclusion of an alternative trading
system in Regulation SCI is one percent (1%) or more of overall volume
in NMS stocks during at least four of the preceding six calendar
months. Would it, for example, be appropriate for the Commission to
apply Regulation SCI to competing consolidators that had one percent
(1%) or more of total subscribers of consolidated market data during at
least four of the preceding six calendar months? Or, would a different
threshold (such as five, ten, or twenty percent) be more appropriate?
Why or why not? Please describe. Do commenters believe that another
measurement (other than total subscribers of consolidated market data)
be more appropriate? If so, what do commenters believe that measurement
should be? Please describe.
120. Do commenters believe that only certain provisions of
Regulation SCI should apply to competing consolidators? For example,
should competing consolidators only be subject to certain aspects of
Regulation SCI, such as the policies and procedures required by Rule
1001 of Regulation SCI; the requirement to provide notification of SCI
events and to take corrective action as required by Rule 1002 of
Regulation SCI; the requirement to conduct SCI reviews as required by
Rule 1003 of Regulation SCI; the requirement to perform disaster
recovery testing as required by Rule 1004 of Regulation SCI; the
requirements related to recordkeeping, as required by Rule 1005 of
Regulation SCI; the requirements relating to electronic filing on Form
SCI pursuant to Rule 1006 of Regulation SCI; and the requirements
relating to service bureaus, as required by Rule 1007 of Regulation
SCI? If so, which provisions should apply? Do commenters believe that
different or unique requirements should apply to the systems of
competing consolidators? What should they be and why?
121. In what instances, if at all, should the systems of competing
consolidators be defined as ``critical SCI systems''? Please describe.
122. Which subscribers or types of subscribers should competing
consolidators consider as ``designated members or participants'' that
should be required to participate in the annual mandatory business
continuity and disaster recovery testing? Please describe.
123. Do commenters believe that requiring competing consolidators
to be defined as SCI entities would deter parties from registering as
competing consolidators? Why or why not?
124. Do commenters believe that competing consolidators should not
be defined as SCI entities but should be required to comply with
provisions comparable to provisions of Regulation SCI? Why or why not?
125. If commenters believe that competing consolidators should not
be defined as SCI entities but should be required to comply with
provisions comparable to provisions of Regulation SCI, what provisions
should apply? Should competing consolidators be required to have
business continuity and disaster plans, to designate subscribers that
the competing consolidator determines are necessary for the maintenance
of fair and orderly markets in the event of the activation of such
plans, to mandate such subscribers' participation in scheduled
functional and performance testing of the operation of such plans not
less than once every 12 months, and to coordinate testing of such plans
on an industry- or sector-wide basis with SCI entities, or otherwise be
required to participate in coordinated testing scheduled by SCI
entities? Why or why not?
126. Do commenters believe that existing proprietary market data
aggregation firms that wish to register as competing consolidators
would establish separate legal entities for that purpose? Why or why
not?
3. Self-Aggregators
Currently, some broker-dealers effectively act as self-aggregators
by purchasing proprietary data products from the exchanges,
consolidating that information (either independently or with the use of
vendor services and/or hardware), and calculating the NBBO for their
own use. Broker-dealers may self-aggregate to eliminate various forms
of latency \597\ or to access the additional content provided by
proprietary data feeds in a consolidated form. This self-aggregated
consolidated data may be used for SORs, algorithmic trading systems,
alternative trading systems (``ATSs''), visual display, or other uses.
While broker-dealers raised concerns about the costs associated with
proprietary data products, some have developed these self-aggregation
solutions as a means to address the
[[Page 16790]]
latency and content issues that are present with the exclusive SIPs
themselves.\598\ The Commission preliminarily believes that broker-
dealers should be permitted to continue to self-aggregate consolidated
market data as proposed to be defined under the proposed decentralized
consolidation model. The Commission is concerned that eliminating the
ability of broker-dealers to self-aggregate proposed consolidated
market data for their own use would be unnecessarily disruptive to the
current market data infrastructure landscape.
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\597\ See supra Section IV.A for a discussion of geographic,
aggregation, and transmission latencies.
\598\ See, e.g., Roundtable Day One Transcript at 198-199
(Joseph Wald, Clearpool) (``Clearpool and other broker-dealers are
compelled to purchase exchanges' proprietary data feeds, both to
provide competitive execution services to our clients and to meet
our best execution obligations due to the content of the information
contained in the proprietary data feeds as well as the latency
differences between them, which are major and important
considerations for brokers.'').
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Accordingly, the Commission proposes to amend Rule 600(b) to add a
definition of a self-aggregator. The Commission proposes to define a
self-aggregator as ``a broker or dealer that receives information with
respect to quotations for and transactions in NMS stocks, including all
data necessary to generate consolidated market data, and generates
consolidated market data solely for internal use. A self-aggregator may
not make consolidated market data, or any subset of consolidated market
data, available to any other person.'' In particular, a self-aggregator
would collect the NMS information necessary to generate proposed
consolidated market data that it needs to trade for its own account or
to execute transactions for its customers. A self-aggregator would
generate the proposed consolidated market data that it needs for its
business, such as calculating current protected bids and offers from
each trading center for purposes of Rule 611 and the current best bids
and offers from each trading center for achieving and analyzing best
execution.\599\ The proposed definition would prohibit self-aggregators
from disseminating proposed consolidated market data to any person,
including a customer or any affiliated entity, as such action would not
be for the internal use of a self-aggregator and would be akin to the
actions of a competing consolidator, and thus would require
registration as a competing consolidator.
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\599\ A self-aggregator also would receive from the primary
listing exchanges regulatory data (as defined as proposed
consolidated market data), which would be necessary for meeting
regulatory obligations, such as monitoring Short Sale Circuit
Breakers and LULD price bands. See supra Section III.D.
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Like competing consolidators, a self-aggregator would collect all
information with respect to quotations for and transactions in NMS
stocks directly from each SRO, but importantly, self-aggregators would
not be permitted to re-distribute or re-disseminate proposed
consolidated market data to any person, including to any affiliates or
subsidiaries. A self-aggregator that re-distributed or re-disseminated
proposed consolidated market data, or any subset of proposed
consolidated market data, would be performing the functions of a
competing consolidator and, accordingly, would be required to register
as a competing consolidator. Self-aggregators would establish
connectivity to the SROs directly or through the use of a service
provider and would either use their own proprietary technology or that
of a third party vendor to perform aggregation and any other functions
necessary for generating proposed consolidated market data. A vendor
providing hardware, software, and/or other services for the purposes of
self-aggregation would not be a competing consolidator unless it
collected and aggregated proposed consolidated market data in a
standardized format within its own facility (e.g., not that of a
broker-dealer customer) and resold that configuration of proposed
consolidated market data to a customer.
As discussed above, pursuant to Rule 603(b), self-aggregators would
receive access from the SROs, either directly or via the use of a
vendor, to the data necessary to generate proposed consolidated market
data in the same manner and using same methods as other persons,
including competing consolidators.\600\ A self-aggregator that limits
its use of exchange data to the creation of proposed consolidated
market data would be charged only for proposed consolidated market data
pursuant to the effective national market system plan(s) fee
schedules.\601\ A self-aggregator that uses an exchange's proprietary
data (e.g., full depth of book data) could be charged separately for
the proprietary data use pursuant to the individual exchange's fee
schedule.\602\
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\600\ See supra Section IV.B.1.
\601\ See infra Section IV.B.4 for a discussion of the effective
national market system plan(s). This would apply to proposed
consolidated market data provided through an exchange's proprietary
data product.
\602\ SRO fees for market data other than the proposed
consolidated market data would be subject to the rule filing process
pursuant to Section 19(b) and Rule 19b-4.
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(a) Roundtable Discussion and Comments
Roundtable participants discussed self-aggregation. One panelist
described a variation of the self-aggregation alternative that he
referred to as the ``one feed-one speed'' model.\603\ The panelist
suggested that consolidated market data should be made available in a
similar manner and using the same framework as the exchanges use to
make available their direct proprietary data feeds.\604\
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\603\ See Roundtable Day Two Transcript at 27-29 (Adam Nunes,
Hudson River Trading).
\604\ Id. This panelist also published a note that described the
ability of firms and vendors to receive data directly from the
exchanges. See Adam Nunes, MMI Member Guest Editorial: Speed up the
SIP, Modern Markets Initiative (Dec. 22, 2015), available at https://www.modernmarketsinitiative.org/archive/2018/11/14/mmi-member-guest-editorial-speed-up-the-sip. In this note, the panelist
described a model in which (1) firms would order the SIP data as
they do today, by contacting their vendor or the SIP administrator;
(2) the firm/vendor connecting to the SIP would get a connection to
each exchange to listen to their data where the data is produced
(rather than getting the data from a central location); and (3) the
firm would receive and process the data similarly to how it handles
direct market data feeds.
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The Commission received one comment letter that supported
consideration of a self-aggregation model. The commenter believed that
this approach would further the principles of transparency and fairness
and ``level the playing field for industry participants.'' \605\
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\605\ See Letter to Brent J. Fields, Secretary, Commission, from
Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative,
5-6 (Oct. 18, 2018) (``Modern Markets Initiative Letter''). One
commenter advocated that each exchange should provide a single data
feed to market participants (instead of a SIP data feed and
proprietary data feeds). The commenter said that a single data feed
``would better serve market participants from the standpoint of
equality and fairness.'' However, the commenter also noted that
investors would benefit from competition among organizations able to
operate as SIPs, either through a bidding process for a centralized
SIP or the ability of multiple SIPs to operate (i.e., a competing
consolidator model). See T. Rowe Price Letter at 3.
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In contrast, the Commission received one comment letter that
expressed criticism of a self-aggregation model. The commenter urged
against government intervention requiring all market participants to
use the same connectivity and the same data, explaining that different
customers need different products and that the government should not
limit choices ``in this radical manner.'' \606\ The commenter also
stated that adding multiple consolidators or competing SIPs to the
model would magnify risks.\607\
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\606\ See Wittman Letter at 15.
\607\ Id. at 16.
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[[Page 16791]]
(b) Commission Discussion
The Commission preliminarily believes that the proposed
decentralized consolidation model should allow broker-dealers to
continue to self-aggregate by collecting and calculating consolidated
market data, as proposed, solely for their internal use, in a manner
that would allow access to proposed consolidated market data on fair
and reasonable terms and without the inefficiencies and added latencies
associated with the existing exclusive SIP model.
The proposed decentralized consolidation model is designed to
increase, rather than limit, market participants' choices with respect
to data products and connectivity. Accordingly, the Commission
preliminarily believes that broker-dealers should be able to choose to
self-aggregate consolidated market data for their own internal purposes
in a similar manner as they may do today with proprietary data. Under
the proposed rules, competing consolidators and self-aggregators would
be able to select the transmission services that meet the needs of
their client or their individual needs, respectively, rather than be
restricted to transmission services mandated by the Equity Data Plans.
In addition, the proposed rules would allow competing consolidators and
self-aggregators to choose to receive exchange data products that
include only proposed consolidated market data elements or products
that contain both proposed and non-proposed consolidated market data
elements (e.g., existing proprietary data products).
As discussed more fully above, the proposed rules would permit the
exchanges to offer different connectivity options (e.g., with different
latencies, throughput capacities, and data-feed protocols) to market
data customers but would require that any options provided to
proprietary data customers be available to competing consolidators and
self-aggregators in the same manner and using the same methods,
including all methods of access and the same format, for the purpose of
collecting and consolidating proposed consolidated market data.
Self-aggregators may have a minor latency advantage over market
participants that decide to utilize a competing consolidator for their
consolidated market data, due to the fact that self-aggregators will be
collecting and consolidating this data for themselves rather than
relying on a competing consolidator to do so, and therefore would
eliminate a potential latency cost that comes with an extra hop within
a given data center. The Commission, however, preliminarily believes
that the addition of competitive forces with the introduction of
competing consolidators should minimize these inherent latencies.\608\
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\608\ Some have argued that speed-based competition in modern
markets--in particular, the speed advantages of high-frequency
traders and practices such as ``latency arbitrage''-- impose costs
on investors and other market participants. See, e.g., Matteo
Aquilina, et al., Quantifying the High-Frequency Trading ``Arms
Race'': A Simple New Methodology and Estimates, Financial Conduct
Authority (Jan. 2020), available at https://www.fca.org.uk/publication/occasional-papers/occasional-paper-50.pdf?mod=article_inline. But see Bartlett and McCrary, supra note
418. As discussed above, the Commission preliminarily believes that
the proposed decentralized consolidation model would reduce latency
in the distribution of proposed consolidated market data and speed-
based information asymmetries between market participants. See supra
Section IV.B.
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The Commission has not proposed a separate registration requirement
for self-aggregators, nor has it proposed to impose the obligations of
competing consolidators on self-aggregators. Because self-aggregators
will be broker-dealers who are subject to broker-dealer registration
requirements, the Commission preliminarily believes that imposing an
additional registration requirement and the competing consolidator
obligations on self-aggregators would be unnecessary and could result
in undue costs and burdens. Further, self-aggregators would be required
to calculate and generate proposed consolidated market data, or a
component of proposed consolidated market data, to the extent that such
information is necessary for the self-aggregator to comply with
applicable regulatory requirements. For example, to the extent that a
self-aggregator's activities require that self-aggregator to generate
the NBBO, the self-aggregator would be required to do so consistent
with proposed Rule 600(b)(50). Any self-aggregator that disseminates to
any person--including to an affiliate or subsidiary of the self-
aggregator--or makes public the proposed consolidated market data, or
any subset of the proposed consolidated market data, would be required
to register as a competing consolidator.\609\
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\609\ A self-aggregator that provides a software product to
other broker-dealers for purposes of allowing such other broker-
dealers to self-aggregate SRO data to generate proposed consolidated
market data within such other broker-dealers' facilities would not
be a competing consolidator because the self-aggregator itself would
not be generating consolidated market data for dissemination to such
broker-dealers. However, if an entity uses its own software product
to aggregate SRO data to generate proposed consolidated market data
within the self-aggregator's facilities and thereafter redistributes
or disseminates proposed consolidated market data to other broker-
dealers or market participants, such entity would be a competing
consolidator because it would be generating and disseminating
consolidated market data to others.
---------------------------------------------------------------------------
The Commission requests comment on the proposed amendment to Rule
600(b)(82) to introduce a definition of ``self-aggregator.'' In
particular, the Commission solicits comment on the following:
127. Is the definition of self-aggregator as ``a broker or dealer
that receives information with respect to quotations for and
transactions in NMS stocks, including all information necessary to
generate consolidated market data, and generates consolidated market
data solely for internal use'' too broad or narrow? Should other
entities be included in the definition? Please identify such entities
and explain.
128. Are the distinctions between self-aggregators and competing
consolidators sufficiently clear? Should any additional clarification
be provided to fully distinguish between a vendor that provides self-
aggregation services to multiple broker-dealers and competing
consolidators that provide aggregated data to multiple broker-dealers?
If so, please describe what additional clarification should be
provided.
129. Should self-aggregators be subject to a registration
requirement? Why or why not?
130. Self-aggregators may have a minor latency advantage over
competing consolidators. Please provide comment on this potential
latency advantage. Would the latency advantage be material? Are there
methods to neutralize any latency advantage between self-aggregators
and competing consolidators? If so, should they be instituted?
131. Should self-aggregators be permitted to disseminate proposed
consolidated market data to their affiliates and subsidiaries without
being required to register as a competing consolidator? Why or why not?
Does the restriction on not providing consolidated market data or a
subset thereof to customers or affiliates reflect a significant
departure from current practices? Please explain.
132. Should any market participants aside from broker-dealers be
included in the proposed definition of self-aggregator? Please explain.
4. Amendment to the Effective National Market System Plan(s) for NMS
Stocks
An integral part of the national market system is the use of NMS
plans. Section 11A(a)(3)(B) of the Exchange Act reflects their
importance by providing the Commission the authority to require the
SROs, by order, ``to act jointly . . . in planning, developing,
operating, or
[[Page 16792]]
regulating a national market system (or a subsystem thereof).'' The
Equity Data Plans, which are the effective national market system plans
for NMS stocks,\610\ historically have played an important role in
developing, operating, and governing the national market system.\611\
The proposed decentralized consolidation model would fundamentally
change the national market system and the role of the Equity Data
Plans.\612\ Under the decentralized consolidation model, the effective
national market system plan(s) for NMS stocks, would continue to play
an important but modified role in the national market system.\613\
Therefore, the Commission is proposing in Rule 614(e) that an amendment
to the effective national market system plan(s) be filed with the
Commission to conform the plan(s) to the decentralized consolidation
model, to address the application of timestamps by the SROs, to require
annual assessments of competing consolidators' performance, and to
develop a list of the primary listing market for each NMS stock, as
discussed below. Proposed Rule 614(e) would require the participants to
the effective national market system plan(s) for NMS stocks to submit
an amendment pursuant to Rule 608 to conform the plan(s) to the
proposed decentralized consolidation model within 60 calendar days from
the effective date of Rule 614.
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\610\ See Proposed Governance Order, supra note 8.
\611\ See supra Section II.A.
\612\ Id.
\613\ Pursuant to the proposed amendments to Rule 603(b),
proposed consolidated market data would be collected, consolidated,
and disseminated pursuant to an effective national market system
plan.
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As discussed above, today, the Equity Data Plans operate the
exclusive SIPs for the collection, consolidation, and dissemination of
SIP data.\614\ In the decentralized consolidation model, the effective
national market system plan(s) for NMS stocks would no longer be
responsible for collecting, consolidating, and disseminating
consolidated market data and would no longer operate an exclusive
SIP.\615\ Instead, the participants of the effective national market
system plan(s) for NMS stocks would develop and file with the
Commission the fees for SRO data content required to be made available
by each SRO to competing consolidators and self-aggregators for the
creation of proposed consolidated market data, including fees for SRO
market data products that contain all of the components of proposed
consolidated market data as well as the fees for market data products
that contain only a subset of the components of proposed consolidated
market data.\616\ The effective national market system plan(s) would
also collect fees for the SRO data content used to create the proposed
consolidated market data; \617\ and allocate the revenues among the SRO
participants. The effective national market system plan(s) would also
oversee plan accounts and plan audits for purposes of billing, among
other things.\618\
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\614\ See supra Section II.A.
\615\ The Commission preliminarily believes that the operators
of the existing exclusive SIPs may choose to become competing
consolidators. See infra Section IV.B.6.
\616\ For example, the operating committee of the effective
national market system plan(s) could develop different pricing for a
TOB product that includes only certain SRO data content used to
create proposed consolidated market data. See supra note 316 and
accompanying text. See also NYSE Sharing Data-Driven Insights--Stock
Quotes and Trade Data: One Size Doesn't Fit All (Aug. 22, 2019),
available at https://www.nyse.com/equities-insights#20190822
(proposing to replace the exclusive SIP feeds with three tiered
levels of service, including certain DOB data, based on the needs of
specific types of investors). Nothing in this proposal would prevent
the operating committee of the effective national market system
plan(s) from structuring the sale of data in a similar manner.
\617\ See supra Section IV.B.1.
\618\ The effective national market system plan(s) for NMS
stocks would review the performance of competing consolidators. See
infra discussion on proposed Rule 614(e) (1)(iii).
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Rule 614(e)(1) would direct the participants to file with the
Commission an amendment to the effective national market system plan(s)
for NMS stocks in order to conform the plan(s) to reflect the proposed
consolidated market data and proposed decentralized consolidation
model. The Commission preliminarily believes that to conform to the
proposed decentralized consolidation model, the effective national
market system plan(s) for NMS stocks would need to be amended to
reflect the fees for the proposed consolidated market data. The
proposed new fees would need to reflect the following: (i) That
proposed consolidated market data includes the content described above,
including depth of book data, auction information, and additional
information on orders of sizes smaller than 100 shares; (ii) that the
effective national market system plan(s) for NMS stocks is no longer
operating an exclusive SIP and is no longer performing aggregation and
other operational functions; and (iii) that the SROs are no longer
responsible for the connectivity and transmission services required for
providing data to the exclusive SIPs from the SROs' data centers since
the exclusive SIPs will no longer be operated by the effective national
market system plan(s) for NMS stocks.\619\ The proposed new fees for
consolidated market data must be fair and reasonable and not unfairly
discriminatory.\620\ The proposed fees must be submitted by the
participants of the effective national market system plan(s) for NMS
stocks pursuant to Rule 608 under the Exchange Act. In addition, to
conform the effective national market system plan(s) for NMS stocks to
the proposed decentralized consolidation model, the amendment to the
plan(s) generally should include a harmonized approach to data billing
protocols, including with respect to any unified multiple
installations, single users (``MISU'') policy.\621\
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\619\ As noted above, pursuant to proposed Rule 603(b), each SRO
must provide its NMS information, including all data necessary to
generate proposed consolidated market data, to all competing
consolidators and self-aggregators in the same manner and using the
same methods, including all methods of access and the same format,
as such SRO makes available any information to any other person. The
competing consolidators and self-aggregators will be responsible for
establishing the connectivity and transmission services they use to
connect to the SROs.
\620\ See Rule 603(a) of Regulation NMS, 17 CFR 242.603(a).
\621\ MISU policies seek to ensure that a single device fee is
applied to a data user that receives consolidated market data on
multiple display devices. See, e.g., CTA, CTA Multiple Installations
for Single Users (MISU) Policy (Apr. 2016), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/Policy%20-%20MISU%20with%20FAQ.pdf. MISU policies would need to be
conformed in the proposed decentralized consolidation model to
reflect that consolidated market data users may seek to receive
through more than one competing consolidator and/or access through
multiple devices.
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Proposed Rule 614(e)(1)(ii) would require the participants to file
a proposed amendment to the effective national market system plan(s)
for NMS stocks to address the application of timestamps by the SRO
participants on proposed consolidated market data, including the time
the proposed consolidated market data was generated by the SRO
participant and the time the SRO participant made the proposed
consolidated market data available to competing consolidators and self-
aggregators. Timestamping should provide incentives for the SROs to
generate and disseminate proposed consolidated market data as quickly
as possible. Further, the Commission preliminarily believes that the
application of timestamps will be an important part of market
participants' ability to measure latency and to seek to ensure accurate
sequencing of data in the new national market system, and therefore the
application of timestamps should be consistent and reliable.\622\
[[Page 16793]]
The Commission understands that the SROs currently submit timestamped
data under the SIP plans \623\ and the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan'').\624\
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\622\ SRO timestamps would also assist market participants in
their ability to assess latencies in the provision of proposed
consolidated market data. Under proposed Rule 614(d)(3), competing
consolidators would have to make available consolidated market data
that includes timestamps assigned by the SROs as well as competing
consolidators. See supra Section IV.B.2(e)(ii) and the discussion of
proposed Rule 614(d)(4).
\623\ See, e.g., CTA Plan, supra note 13, at Section VI.(c);
Nasdaq UTP Plan, supra note 13, at Section VIII.
\624\ See CAT NMS Plan at Sections 6.3(d), 6.8. As required by
Rule 613, the CAT NMS Plan was filed with the Commission by the
national securities exchanges and national securities associations,
who include BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.),
BATS-Y Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Exchange
LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange,
Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe
Exchange, Inc.), Chicago Stock Exchange, Inc. (n/k/a NYSE Chicago,
Inc.), EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX
Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry
Regulatory Authority, Inc. (``FINRA''), International Securities
Exchange, LLC (n/k/a Nasdaq ISE, LLC), ISE Gemini, LLC (n/k/a Nasdaq
GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX
BX, Inc. (n/k/a Nasdaq BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a Nasdaq
PHLX LLC), The Nasdaq Stock Market LLC, National Stock Exchange,
Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE
MKT LLC, and NYSE Arca, Inc. See 17 CFR 242.613; Securities Exchange
Act Release No. 78318 (Nov. 15, 2016), 81 FR 84696, (Nov. 23, 2016)
(``CAT NMS Plan Approval Order''). The CAT NMS Plan is Exhibit A to
the CAT NMS Plan Approval Order. See CAT NMS Plan Approval Order, at
84943-85034. In approving the CAT NMS Plan, the Commission added ISE
Mercury, LLC (n/k/a Nasdaq MRX, LLC) and Investors' Exchange LLC as
Participants to the CAT NMS Plan. See id. at 84728. On January 30,
2017 and March 1, 2019, the Commission noticed for immediate
effectiveness amendments to the CAT NMS Plan to add MIAX PEARL, LLC
and MIAX Emerald, LLC, respectively, as Participants. See Securities
Exchange Act Release Nos. 79898 (Jan. 30, 2017), 82 FR 9250 (Feb. 3,
2017), and 85230 (Mar. 1, 2019), 84 FR 8356 (Mar. 7, 2019). On
November 27, 2019, the Commission noticed for immediate
effectiveness amendments to the CAT NMS Plan to add Long-Term Stock
Exchange, Inc. as a Participant. See Securities Exchange Act Release
No. 87595 (Nov. 22, 2019), 84 FR 65447 (Nov. 27, 2019). The CAT NMS
Plan functions as the limited liability company agreement of the
jointly owned limited liability company formed under Delaware state
law through which the Participants conduct the activities of the CAT
(the ``Company''). Each Participant is a member of the Company and
jointly owns the Company on an equal basis. The Participants
submitted to the Commission a proposed amendment to the CAT NMS Plan
on August 29, 2019, which they designated as effective on filing.
Under the amendment, the limited liability company agreement of a
new limited liability company named Consolidated Audit Trail, LLC
serves as the CAT NMS Plan, replacing in its entirety the CAT NMS
Plan. See Securities Exchange Act Release No. 87149 (Sept. 27,
2019), 84 FR 52905 (Oct. 3, 2019).
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Proposed Rule 614(e)(1)(iii) would require the participants to file
a proposed amendment to the effective national market system plan(s)
for NMS stocks to reflect that the participants would need to conduct
an annual assessment of the overall performance of competing
consolidators, including speed, reliability, and cost of data provision
and provide the Commission with a report of such assessment on an
annual basis. As noted above, the Equity Data Plans play an important
role in governing the operation of the national market system. The
Commission preliminarily believes that the effective national market
system plan(s) for NMS stocks should continue in this important role by
monitoring the overall performance of competing consolidators to seek
to ensure that the decentralized consolidation model is operating
soundly. To aid the Commission's monitoring, the Commission is
requiring the effective national market system plan(s) for NMS stocks
to provide assessments in key factors of competing consolidators,
including: Speed of the competing consolidators in receiving,
calculating, and disseminating proposed consolidated market data; the
reliability of the transmission of proposed consolidated market data;
and a detailed cost analysis of the provision of proposed consolidated
market data. The effective national market system plan(s) would base
their assessments on publicly available information about the competing
consolidators, including the information that each competing
consolidator would be required to make available under proposed Rule
614.
Finally, proposed Rule 614(e)(1)(iv) would require the participants
to file an amendment to the effective national market system plan(s)
for NMS stocks to include a list that identifies the primary listing
exchange for each NMS stock. As discussed above, primary listing
exchanges will be required to collect, calculate, and provide the data
included in the proposed definition of ``regulatory data'' to competing
consolidators and self-aggregators. Moreover, the Commission is
proposing to define ``primary listing exchange'' in proposed Rule
600(b)(67) as ``for each NMS stock, the national securities exchange
identified as the primary listing exchange in the effective national
market system plan or plans required under Sec. 242.603(b).'' The
effective national market system plan(s) for NMS stocks must
accordingly be amended to include this list so that the primary listing
exchange for each NMS stock--and the responsibilities regarding the
collection, calculation, and provision of regulatory data--are clear.
The Commission preliminarily believes that information regarding the
primary listing exchange for each NMS stock is readily accessible and
that the operating committee of the effective national market system
plan(s) for NMS stock, which will have representation from each primary
listing exchange, is well-situated to include such a list in a plan
amendment.
The Commission requests comment on proposed Rule 614(e). In
particular, the Commission solicits comment on the following:
133. Do the proposed amendments to the effective national market
system plan(s) for NMS stocks reflect an appropriate role for the NMS
plan(s) under the proposed decentralized consolidation model?
134. Should the rule include other provisions that should be
included in an amendment to the effective national market system
plan(s) for NMS stocks? Please describe.
135. Should the rule require an amendment to the effective national
market system plan(s) for NMS stocks to include plan provisions related
to the development by competing consolidators of non-core market data
products (i.e., a full depth of book product)? Why or why not?
136. Should the rule require an amendment to the effective national
market system plan(s) to require the operating committee of such
plan(s) to develop latency statistics based on the SRO timestamps and
make them publicly available?
137. Do commenters believe that the proposed timestamps are
sufficiently comprehensive? Should the Commission require other
timestamps to be added by the SROs, or should any of the proposed
requirements for the timestamps be pared down or removed? Please
explain.
138. Should the rule require an amendment to the effective national
market system plan(s) for NMS stocks to specify a method for
synchronizing clocks on the various systems and networks utilized in
the provision of proposed consolidated market data? If yes, what is the
appropriate method or protocol (e.g., Precision Time Protocol vs.
Network Time Protocol)? Or should the requirement for clock
synchronization be performance based (i.e., accurate to less than one
microsecond)? If so, what is the appropriate standard for maximum
allowable clock drift? Please explain. Should the SROs be required to
publish clock drift statistics?
139. Do commenters believe that there are other measures to assess
the performance of competing consolidators that should be included in
the annual report? Please explain.
[[Page 16794]]
140. Do commenters believe that a portion of the assessment or the
full assessment should be made public? Do commenters believe that a
portion of the annual report or the full annual report to the
Commission should be made public? Why or why not? Please explain.
141. Do commenters believe that the operating committee for the
effective national market system plan(s) for NMS stocks should conduct
an assessment and provide the Commission with a report more frequently
than annually, or at all? Please describe any alternative frequency and
the rationale.
142. Do commenters believe that a similar report should be
generated for self-aggregators? If so, please explain. Should self-
aggregators be required to publish any performance statistics publicly
or to the Commission?
143. Do commenters believe that the effective national market
system plan(s) for NMS stocks should be amended to include a list that
identifies the primary listing exchange for each NMS stock? Please
explain. Are there alternative ways to ensure that the primary listing
exchange for each NMS stock is clearly identified? Please explain.
144. Do commenters believe that the effective national market
system plan(s) for NMS stocks should include fees for different types
of proposed consolidated market data products, such as products that
contain only a subset of proposed core data elements (e.g., a TOB
product)? If so, what products should be included?
5. Effects on the National Market System Plan Governing the
Consolidated Audit Trail
The CAT NMS Plan requires the Central Repository \625\ to ``collect
(from a SIP \626\ or pursuant to an NMS Plan \627\) and retain on a
current and continuing basis . . . all data, including the following
(collectively, `SIP Data').'' \628\ The Commission preliminarily
believes that this provision of the CAT NMS Plan will be affected by
the proposed decentralized consolidation model and the proposed
definition of consolidated market data. Rule 603(b), as proposed to be
amended, would require the national securities exchanges and
associations to distribute consolidated market data ``pursuant to one
or more effective national market system plans.'' Under Section
6.5(a)(ii) of the CAT NMS Plan, the Central Repository must collect and
retain ``all data'' from ``a SIP or pursuant to an NMS Plan,'' so the
Central Repository would be required to collect and retain consolidated
market data.
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\625\ The CAT NMS Plan defines ``Central Repository'' as ``the
repository responsible for the receipt, consolidation, and retention
of all information reported to the CAT pursuant to SEC Rule 613 and
this Agreement.'' CAT NMS Plan, supra note 624, at Section 1.1.
\626\ The CAT NMS Plan defines ``Securities Information
Processor'' or ``SIP'' as having ``the same meaning provided in
Section 3(a)(22)(A) of the Exchange Act.'' Id. at Section 1.1.
\627\ The CAT NMS Plan defines ``NMS Plan'' as having ``the same
meaning as `National Market System Plan' provided in SEC Rule
613(a)(1) and SEC Rule 600(b)(43).'' Id. at Section 1.1.
\628\ Id. at Section 6.5(a)(ii). Section 6.5(a)(ii) specifically
enumerates the following ``SIP Data'' elements: ``(A) Information,
including the size and quote condition, on quotes including the
National Best Bid and National Best Offer for each NMS Security; (B)
Last Sale Reports and transaction reports reported pursuant to an
effective transaction reporting plan filed with the SEC pursuant to,
and meeting the requirements of, SEC Rules 601 and 608; (C) trading
halts, Limit Up/Limit Down price bands, and Limit Up/Limit Down
indicators; and (D) summary data or reports described in the
specifications for each of the SIPs and disseminated by the
respective SIP.'' Id.
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Because proposed consolidated market data would include information
beyond the data that is currently disseminated by the exclusive SIPs,
such as smaller-sized orders in higher-priced stocks pursuant to the
proposed definition of round lot, proposed depth of book data, and
proposed auction information, the scope of the consolidated data
collected and retained by the CAT Central Repository would be expanded.
In addition, the Central Repository may have to obtain the data from a
different source. The Commission preliminarily believes that having the
Central Repository collect an expanded set of data from a different
source and retain this data in the Central Repository are appropriate
to further the objectives of CAT by enabling regulators to use the
expanded set of data ``solely for surveillance and regulatory
purposes.'' \629\
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\629\ See CAT NMS Plan, supra note 624, at Section 6.5(g); infra
Section VI.C.4(c).
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The Commission requests comment on the effects of the proposed
decentralized consolidation model and the proposed definition of
consolidated market data on the CAT. In particular, the Commission
solicits comment on the following:
145. Do commenters believe that CAT should receive consolidated
market data from one competing consolidator, all competing
consolidators, or some specific subset of competing consolidators?
Please explain.
146. Do commenters believe the selection by the CAT of a competing
consolidator could have a competitive impact on other competing
consolidators? Please explain.
6. Transition Period
A transition period would be necessary to implement the
decentralized consolidation model. While SROs would be permitted to
make the data necessary to generate consolidated market data, as
proposed to be defined, available to competing consolidators and self-
aggregators using their existing data feeds, SROs may also choose to
provide this data through new, separate feeds,\630\ which would require
development time. Furthermore, the proposed requirements related to the
provision by SROs of regulatory data to competing consolidators and
self-aggregators would require SROs to make adjustments to their data
collection and processing systems and procedures to integrate the
proposed regulatory data elements into new or existing data feeds.\631\
In addition, firms intending to act as competing consolidators or self-
aggregators will need to register, develop or modify systems, establish
pricing, and make other preparations needed to function as competing
consolidators or self-aggregators. Finally, market participants would
be expected to need some period of time for implementation and testing
of any new data feeds. As these changes are being implemented, market
participants will continue to need a consistent and reliable source of
consolidated market data.
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\630\ See supra Section IV.B.1.
\631\ See supra Section III.D.
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Accordingly, the Commission preliminarily believes that the
existing exclusive SIPs should continue their operations until such
time as the Commission considers and approves an NMS plan amendment
that would effectuate a cessation of their operations as exclusive
SIPs. In considering and approving such an NMS plan amendment, the
Commission preliminarily believes that it would need to consider the
operational readiness of competing consolidators and self-aggregators
to determine whether market participants are fully able to receive
proposed consolidated market data in a manner that is sufficiently
prompt, accurate, and reliable.\632\ The Commission preliminarily
believes that sufficient operational readiness would only be achieved
once consolidated market data generated under the decentralized
consolidation model is demonstrably capable of supporting the various
needs of users of consolidated market data, including needs for visual
display, trading activities, and compliance with
[[Page 16795]]
regulatory obligations, such as under Rules 603(c) and Rule 611 under
Regulation NMS and best execution. In determining whether to approve an
NMS plan amendment to effectuate the cessation of the operations of the
existing exclusive SIPs and whether it meets the standards set forth in
Rule 608(b)(2),\633\ the Commission would consider the state of the
market and the general readiness of the competing consolidator
infrastructure. Examples of some of the things that the Commission
could consider include, among other things: The status of registration,
testing, and operational capabilities of multiple competing
consolidators, self-aggregators, and market participants; capabilities
of competing consolidators to provide monthly performance metrics and
other data required to be published pursuant to proposed Rule
614(d)(5)-(6); \634\ and the consolidated market data products offered
by competing consolidators. The Commission preliminarily believes that
consideration of these and other factors should help to ensure that
market participants have effective and continuous access to proposed
consolidated market data and other market data products during the
transition period and prior to the cessation of operations of the
existing exclusive SIPs.
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\632\ Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k-
1(c)(1)(B).
\633\ See 17 CFR 242.608(b)(2) (providing that the Commission
shall approve an NMS plan amendment ``if it finds that such plan or
amendment is necessary or appropriate in the public interest, for
the protection of investors and the maintenance of fair and orderly
markets, to remove impediments to, and perfect the mechanisms of, a
national market system, or otherwise in furtherance of the purposes
of the Act.'').
\634\ See supra Section IV.B.2(b).
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The Commission anticipates that the operators of the existing
exclusive SIPs may choose to become competing consolidators and that
they too may need to make additional investments and operational
changes during this transition period to provide a competitive
competing consolidator service.\635\ The Commission preliminarily
believes that the existing exclusive SIPs should have the ability to
pursue such development while continuing concurrent operations of
existing SIPs. Given their experience operating the exclusive SIPs, the
exclusive SIP operators would likely be able to enter the competing
consolidator business from a competitively strong position relative to
other potential competing consolidators.
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\635\ The exclusive SIPs may choose to utilize existing
proprietary data feeds for the provision of consolidated market
data. They may also choose to develop a business to support self-
aggregation by broker-dealers.
---------------------------------------------------------------------------
The Commission requests comment on the proposed transition period
to implement the decentralized consolidation model. In particular, the
Commission solicits comment on the following:
147. What period of time should be expected for SROs to make any
changes necessary to provide the data necessary to generate proposed
consolidated market data to competing consolidators and self-
aggregators?
148. What period of time should be expected for broker-dealers to
make any changes necessary, including testing, to utilize the new data
feeds in a manner that is not disruptive to their trading practices and
their ability to meet their regulatory obligations?
149. What other factors should be taken into consideration to allow
for a smooth transition from a centralized, exclusive SIP model to a
competitive, decentralized consolidation model?
150. What should the Commission take into consideration in
determining whether the availability of proposed consolidated market
data from competing consolidators, or any other aspect of the
development or implementation of the proposed decentralized
consolidation model, is sufficient to allow for the cessation of the
existing exclusive SIPs?
151. Should the Commission require the operation of a certain
number of competing consolidators before allowing the exclusive SIPs to
cease operations? Why or why not? If so, how many competing
consolidators should be operational before allowing exclusive SIPs to
cease operations? Please explain.
152. How long do commenters think such an implementation period
should be? Please explain your answer.
C. Alternatives to the Centralized Consolidation Model
Several alternative approaches to the centralized consolidation
model were suggested by Roundtable respondents and separately by
several exchanges. These suggestions include the distributed SIP model,
a single SIP for all exchange-listed securities, and a low-latency
dedicated connection to existing exclusive SIP feeds.
1. Distributed SIP Alternative
A distributed SIP alternative has been suggested as one possible
means to reduce geographic latency.\636\ Specifically, under a
distributed SIP alternative, each exclusive SIP would place an
additional processor in other major data centers, where the additional
processor would separately aggregate and disseminate consolidated
market data for its respective tape. The SROs would submit their
quotations and trade information directly to each instance of the
exclusive SIP in each data center, and each exclusive SIP instance
would consolidate and disseminate its respective consolidated market
data feeds to subscribers at those data centers, thereby eliminating
geographic latency. Under the distributed SIP alternative, consolidated
market data would not have to travel from an exchange at one location
to an exclusive SIP at a second location for consolidation and
dissemination prior to traveling yet again to a subscriber that may be
at a third location.\637\
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\636\ See supra notes 492-493 and accompanying text; Cboe
Report, supra note 186, at 3-4 (recommending the creation of
distributed SIPs in different geographic locations).
\637\ One commenter noted that the distributed SIP alternative
could address the issue of geographic latency. See SIFMA Letter II
at 3.
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(a) Comments and Roundtable Discussion
The distributed SIP model was suggested and discussed at the
Roundtable by certain panelists and commenters. One panelist who
presented on the distributed SIP model argued that it would be the
least burdensome approach for the industry to reduce delays,\638\
explaining that firms could consume data under the current structure
without having to make any changes if they did not have sub-millisecond
latency concerns, while those firms for which geographic latency is
critical could choose to consume data at the nearest SIP instance.\639\
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\638\ See Roundtable Day Two Transcript at 17 (Michael
Blaugrund, NYSE).
\639\ See Roundtable Day Two Transcript at 18 (Michael
Blaugrund, NYSE). This panelist also believed that the distributed
SIP model would not require changes to Rule 603(b) of Regulation
NMS, which requires the dissemination of consolidated information
for an individual NMS stock through a single plan processor. The
panelist stated that the existing SIPs would remain under the
distributed SIP model, only with additional processors. See
Roundtable Day Two Transcript at 19-20 (Michael Blaugrund, NYSE).
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Two other panelists expressed interest in considering the
distributed SIP model.\640\ One panelist said that the
[[Page 16796]]
distributed SIP model could address the latencies of the current
centralized consolidation model.\641\ Another panelist suggested that a
distributed SIP model with enhanced content, such as auction imbalance
and depth of book information, would be useful \642\ and that even a
fiber optics connection could be sufficient for a distributed SIP model
since the consolidated market data would no longer have to travel
throughout the various data centers for collection and
distribution.\643\
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\640\ See, e.g., Roundtable Day One Transcript at 227-228 (Chris
Issacson, Cboe) (``[W]e're open to discussion about distributed
SIPs.''); at 98-99 (Stacey Cunningham, NYSE) (``. . . there is
debate the NYSE brought to the SIP Committee a long time ago to talk
about the nature of a distributed SIP and that is something we
should explore.''); Roundtable Day Two Transcript at 17 (Michael
Blaugrund, NYSE) (``. . . we think that a distributed SIP
implementation of the existing processors would be the simplest,
least costly approach for the industry to minimize delays when
consolidated data and single market proprietary data are received in
distant data centers.'').
\641\ See Roundtable Day One Transcript at 231-232 (Vlad
Khandros, UBS).
\642\ See Roundtable Day One Transcript at 225 (Ronan Ryan,
IEX).
\643\ See Roundtable Day One Transcript at 229-230 (Ronan Ryan,
IEX). This is a reference to the understanding that a distributed
SIP model would solve for geographic latency.
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Three panelists were skeptical about the value of the distributed
SIP model. One panelist described the distributed SIP model as better
than the current SIP system, ``but just less worse than direct feeds,''
\644\ and said what is desired instead is an exclusive SIP that is as
fast as the direct feeds.\645\ Another panelist said that, with the
distributed SIP model, determining the appropriate instance of the SIP
locations would be complicated.\646\
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\644\ See Roundtable Day Two Transcript at 27 (Adam Nunes,
Hudson River Trading).
\645\ Id.
\646\ See Roundtable Day One Transcript at 151-152 (Oliver
Albers, Nasdaq).
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One commenter submitted two comment letters that discussed the
distributed SIP model. One letter urged the Commission to do a cost
benefit analysis of efforts to decentralize the SIP architecture and
recommended introducing additional instances of existing technology as
the best approach to reducing geographic latency.\647\ The other letter
noted questions about which SIP location would be responsible for
regulatory messages, such as for LULD and MWCBs, and whether the costs
for the industry to connect to this infrastructure would outweigh the
benefits.\648\
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\647\ See Blaugrund Letter at 4. The Blaugrund Letter was
submitted on behalf of NYSE.
\648\ See NYSE Group Letter at 10.
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Another commenter stated that the distributed SIP alternative would
introduce new and expensive operational complexities, legal and
regulatory questions, and possible unintended consequences. This
commenter also questioned whether the distributed SIP alternative would
resolve concerns regarding geographic latency and noted that the NBBO
could differ among the distributed SIPs, leading to operational and
compliance questions.\649\
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\649\ See Albers Letter at 3; Wittman Letter at 14. The Albers
and Wittman Letters were submitted on behalf of Nasdaq. The
commenter also believed that significant advances in clock
synchronization techniques would be necessary. See Wittman Letter at
14. This commenter later expressed support for the distributed SIP
model, stating that the approach could reduce data transmission time
for some market participants between 400 and 750 microseconds. See
Nasdaq Total Markets Report, supra note 127, at 19-20; Remarks by
Tal Cohen, Nasdaq, Meeting of the Securities and Exchange Commission
Investor Advisory Committee, at 50 (``[R]ecognizing the industry's
desire for a distributed SIP, we support this in concept to ensure
geographic latency concerns are addressed.'').
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(b) Commission Discussion
The Commission preliminarily believes that a distributed SIP model
could address the geographic latencies that exist in the current
centralized consolidation model but is concerned that the distributed
SIP model has certain fundamental shortcomings that make it a less
desirable option compared to the proposed competitive, decentralized
consolidation model. In particular, the distributed SIP model does not
allow for the introduction of competitive forces and continues to allow
for one exclusive SIP to have exclusive rights for the dissemination of
market data for the NMS stocks on a given consolidated tape. Because
the distributed SIP model does not introduce competitive forces, it is
less likely to adequately address the broader array of latencies and
competitive product and service offerings.
In addition, insofar as the distributed SIP model does not allow
for the provision of all three consolidated tapes to be consolidated
and disseminated from a single entity, it retains the inefficiencies
that would not apply to a competing consolidator model, such as the
need for end-users to obtain data from multiple SIPs.\650\
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\650\ Since 2017, a distributed SIP subcommittee created by the
CTA and Nasdaq UTP Plan operating committees has considered and
continues to consider implementation of a distributed SIP model to
address geographic latencies. See CTA and UTP Annual Letter, supra
note 181, at 1-2.
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As a result, the Commission preliminarily believes that, since the
distributed SIP model could result in significant additional costs and
complexity and would not be likely to competitively address all forms
of content and latency differentials, the Commission preliminarily
believes that the distributed SIP model is not the optimal solution for
the provision of consolidated market data.
The Commission requests comment on the distributed SIP alternative.
In particular, the Commission solicits comment on the following:
153. Is the distributed SIP alternative a viable or superior
alternative to the proposed competing consolidator and self-aggregator
model? If so, please describe the benefits of the distributed SIP model
and why that model is the preferred alternative.
2. Single SIP Alternative
Another suggestion to modify the centralized consolidation model to
address latency concerns was to combine the exclusive SIPs into a
single exclusive SIP for all exchange-listed securities.\651\ Comments
noted that such a change would permit the harmonization of exclusive
SIP infrastructure \652\ and narrow the latency difference between the
exclusive SIPs and proprietary data feeds.\653\ One commenter thought
this alternative would be a low cost alternative.\654\
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\651\ See Nasdaq Total Markets Report, supra note 127, at 21;
SIFMA Letter II at 3. This suggestion would apply the centralized
consolidation structure.
\652\ See Nasdaq Total Markets Report, supra note 127, at 21.
\653\ See SIFMA Letter II at 3. The commenter did not elaborate
on how this model could address latency issues. This commenter,
however, noted that the use of competing consolidators would best
resolve the latency issues because competition would provide the
incentives for improvements.
\654\ Id.
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In light of the fact that the Nasdaq UTP SIP has less latency that
the CTA/CQ SIP, within the current exclusive and centralized exclusive
SIP model, this solution has certain merits. It could allow for an
upgrade to existing processor technology for the CTA/CQ SIP, which
continues to lag the performance of the Nasdaq UTP SIP. It could also
eliminate certain inefficiencies in having two separate exclusive SIPs
for SIP data. Potentially having a single administrator and exclusive
SIP could ease these burdens and introduce benefits such as a less
complex infrastructure and greater standardization.
However, this alternative has certain key shortcomings. For one
thing, it does not attempt to introduce competitive forces, and,
therefore, as with the distributed SIP alternative, would not
necessarily be expected to fully address all forms of latency in a
competitive data environment. Further, it does not attempt to address
geographic latency, which, as noted, is believed to be the most
significant source of latency undermining the viability of the current
centralized exclusive SIP model.
The Commission requests comment on these alternative approaches to
the current centralized consolidation
[[Page 16797]]
model. In particular, the Commission solicits comment on the following:
154. Is the single exclusive SIP alternative a viable alternative
to addressing the concerns with the current centralized consolidation
model? If so, please describe the operation of the single exclusive SIP
alternative and how it would address the latency and cost concerns
arising from the centralized consolidation model. Are there any other
viable alternatives?
155. Do commenters believe that the single centralized exclusive
SIP model could be a viable solution despite the fact that it would not
introduce competitive forces into the provision of consolidated data
and would not address geographic latency? If so, please describe any
factors that make this solution as good as or better than the proposed
decentralized model.
V. Paperwork Reduction Act
Certain provisions of the proposed rules and proposed rule
amendments contain ``collection of information requirements'' within
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\655\ The
Commission is submitting these collections of information to the Office
of Management and Budget (``OMB'') for review in accordance with 44
U.S.C. 3507(d) and 5 CFR 1320.11. The title of the new collection of
information is ``Market Data Infrastructure and Form CC.'' Further, the
title of the existing collection of information for Regulation SCI is
``Regulation SCI, Form SCI,'' OMB Control No. 3235-0703.\656\ An agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the agency displays a currently
valid control number.
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\655\ 44 U.S.C. 3501 et seq.
\656\ As discussed below, the proposed modifications to
Regulation SCI contain ``collection of information requirements''
within the meaning of the PRA. See infra Section V.G. Further, as
discussed above, the proposed definition of round lot would affect
Rule 606(b)(3) by requiring actionable indications of interest to be
in the proposed round lot sizes and included in 606(b)(3) reports.
The Commission preliminarily believes that the PRA estimates set
forth in the Rule 606 Adopting Release would cover the collection of
actionable indications of interest in the proposed round lot sizes
because there should only be minor systems updates to reflect the
new round lot sizes. See Rule 606 Adopting Release, supra note 227.
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A. Summary of Collection of Information
The proposed rules and rule amendments would include a collection
of information within the meaning of the PRA for competing
consolidators who would be required to comply with the provisions of
Rule 614 and file a Form CC with the Commission. In addition, SROs
would be required to collect information that they would then have to
provide to competing consolidators and self-aggregators for the
purposes to generating proposed consolidated market data. Finally, the
SROs would be required to amend the effective national market system
plan(s) required under Rule 603(b).
1. Registration Requirements and Form CC
Proposed Rule 614(a)(1)(i) would require each competing
consolidator to register with the Commission by filing Form CC
electronically in accordance with the instructions contained on the
form.\657\ To file a form CC, a competing consolidator would need to
access the Commission's EFFS, a secure website operated by the
Commission. Each competing consolidator would have to submit an
application and register each individual who would access the EFFS
system on behalf of the competing consolidator. Proposed Rule
614(a)(1)(ii) would require any reports required under proposed Rule
614 to be filed electronically on Form CC, include all of the
information as prescribed in Form CC and contain an electronic
signature. Proposed Rule 614(a)(1)(iv) would require a competing
consolidator to withdraw an initial Form CC during its review by the
Commission if information on the initial Form CC is or becomes
inaccurate or incomplete. Under proposed Rule 614(a)(2)(i), a competing
consolidator would be required to amend an effective Form CC in
accordance with the instructions therein: (i) Prior to the
implementation of a material change to pricing, connectivity or
products offered; and (ii) no later than 30 calendar days after the end
of each calendar year to correct information that has become inaccurate
or incomplete for any reason. Proposed Rule 614(a)(3) would require a
competing consolidator to provide notice of its cessation of operations
on Form CC at least 30 business days before the date the competing
consolidator ceases to operate as a competing consolidator.
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\657\ As explained above, SROs that wish to act as competing
consolidators would not be required to register with the Commission
on Form CC. See supra note 537.
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2. Competing Consolidator Duties and Data Collection
Proposed Rules 614(d)(1)-(4) would require each competing
consolidator to: (1) Collect from each national securities exchange and
national securities association, either directly or indirectly, the
information with respect to quotations for and transactions in NMS
stocks as provided in Rule 603(b); (2) calculate and generate
consolidated market data as defined in proposed Rule 600(b)(19) from
the information collected pursuant proposed Rule 614(d)(1); (3) make
consolidated market data, as defined in proposed Rule 600(b)(19), and
as timestamped as required by proposed Rule 614(d)(4) and including the
SRO data generation timestamp required to be provided by the SROs by
proposed Rule 614(e)(1)(ii), available to subscribers on a consolidated
basis on terms that are not unreasonably discriminatory; and (4)
timestamp the information collected pursuant to proposed Rule
614(d)(1): (i) Upon receipt from each national securities exchange and
national securities association; (ii) upon receipt of such information
at its aggregation mechanism; and (iii) upon dissemination of
consolidated market data, as defined in proposed Rule 600(b)(19), to
customers. Proposed Rule 614(c) would require each competing
consolidator to make public on its website a direct URL hyperlink to
the Commission's website that contains each effective initial Form CC,
as amended, order of ineffective initial Form CC, and Form CC amendment
to an effective Form CC.
3. Recordkeeping
Proposed Rule 614(d)(7) would require each competing consolidator
to keep and preserve at least one copy of all documents, including all
correspondence, memoranda, papers, books, notices, accounts and such
other records as shall be made or received by it in the course of its
business as such and in the conduct of its business. The proposed rule
would require competing consolidators to keep these documents for a
period of no less than five years, the first two years in an easily
accessible place. Proposed Rule 614(d)(8) would require each competing
consolidator, upon request of any representative of the Commission, to
promptly furnish to such representative copies of any documents
required to be kept and preserved by it.
4. Reports and Reviews
Proposed Rule 614(d)(5) would require each competing consolidator,
within 15 calendar days after the end of each month, to publish
prominently on its website monthly performance metrics, as defined by
the effective national market system plan(s) for NMS stocks, that shall
include at least the following: (i) Capacity statistics; (ii)
[[Page 16798]]
message rate and total statistics; (iii) system availability; (iv)
network delay statistics; (v) latency statistics for the following,
with distribution statistics up to the 99.99th percentile: (A) When a
national securities exchange or national securities association sends
an inbound message to a competing consolidator network and when the
competing consolidator network receives the inbound message; (B) when
the competing consolidator network receives the inbound message and
when the competing consolidator network sends the corresponding
consolidated message to a subscriber; and (C) when a national
securities exchange or national securities association sends an inbound
message to a competing consolidator network and when the competing
consolidator network sends the corresponding consolidated message to a
subscriber. All information posted pursuant to proposed Rule 614(d)(5)
must be publicly posted in downloadable files and must remain free and
accessible (without any encumbrances or restrictions) by the general
public on the website for a period of not less than three years from
the initial date of posting.
Proposed Rule 614(d)(6) would require a competing consolidator,
within 15 calendar days after the end of each month, to publish
prominently on its website the following information: (i) Data quality
issues; (ii) system issues; (iii) any clock synchronization protocol
utilized; (iv) for the clocks used to generate the timestamps described
in proposed Rule 614(d)(4), the clock drift averages and peaks, and the
number of instances of clock drift greater than 100 microseconds; and
(v) vendor alerts. All information posted pursuant to proposed Rule
614(d)(6) must be publicly posted and must remain free and accessible
(without any encumbrances or restrictions) by the general public on the
website for a period of not less than three years from the initial date
of posting.
5. Amendment to the Effective National Market System Plan(s) for NMS
Stocks
As detailed above, proposed Rule 614(e)(1) would direct the
participants to the effective national market system plan(s) for NMS
stocks to submit an amendment to such plan(s) within 60 days of the
effectiveness of the proposed rule that would address several
articulated provisions. In particular, proposed Rule 614(e)(1)(i) would
require that the amendment conform the plan(s) to reflect the provision
of market data that is necessary to generate consolidated market data,
as defined in proposed Rule 600(b)(19), by the SRO participants to
competing consolidators and self-aggregators, and the role that the
plan(s) would have in developing fees for consolidated market data and
defining the monthly performance metrics that competing consolidators
would be required to publish.\658\ Proposed Rule 614(e)(1)(ii) would
require that the participants to the effective national market system
plan(s) for NMS stocks file an amendment that contains provisions
regarding the application of timestamps by the SRO participants on all
consolidated market data, as defined in proposed Rule 600(b)(19), and
that such time stamps be attached at the time the data was generated by
the SRO and the time that the SRO made the proposed consolidated market
data available to competing consolidators and self-aggregators. The
participants to the effective national market system plan(s) for NMS
stocks would be required to file an amendment that includes provisions
relating to assessments of competing consolidator performance that
would include the speed, reliability and cost of data provision and the
provision of an annual report of such assessment to the Commission.
Finally, participants to the effective national market system plan(s)
for NMS stocks would be required to file an amendment to identify the
primary listing market for each NMS stock.
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\658\ See proposed Rule 614(d)(6).
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Proposed Rule 614(e) would impose paperwork burdens on the
participants to the effective national market system plan(s) for NMS
stocks. First, requiring the submission of an amendment or amendments
to the effective national market system plan(s) for NMS stocks would
impose a paperwork burden on the participants of such plan(s)
associated with preparing and filing the amendment or amendments.
Second, defining the monthly performance metrics for competing
consolidators would impose a paperwork burden on the participants of
the plan(s). Third, developing the requirements for the application of
timestamps by the SROs would impose a paperwork burden on the SRO
participants of such plans. Fourth, requiring the provision of an
annual report to the Commission assessing competing consolidator
performance would impose a paperwork burden on the participants of the
effective national market system plan(s) for NMS stocks. Finally,
developing and maintaining a list of the primary listing market for
each NMS stock would impose a paperwork burden on the participants of
the effective national market system plan(s) for NMS stocks.
6. Collection and Dissemination of Information by National Securities
Exchanges and National Securities Associations
The proposed amendment to Rule 603(b) would require every national
securities exchange on which an NMS stock is traded and national
securities association to make available to all competing consolidators
and self-aggregators all information with respect to quotations for and
transactions in NMS stocks, including all data necessary to generate
consolidated market data, in the same manner and using the same
methods, including all methods of access and using the same format, as
such exchange or association makes available any information with
respect to quotations for and transactions in NMS stocks to any person.
SROs would be required to collect the information necessary to generate
proposed consolidated market data, which would be required to be made
available under proposed Rule 603(b). As proposed, the primary listing
exchange would have to collect and make available pursuant to Rule
603(b) information required under Rule 201 of Regulation SHO. Moreover,
the proposal would require the primary listing exchange with the
largest proportion of stocks includes in the S&P 500 Index to monitor
the index throughout the trading day. The collection of information may
require system changes by the SROs.
B. Proposed Use of Information
1. Registration Requirements and Form CC
As discussed above, proposed Form CC, Rules 614(a)(1) and 614(a)(2)
would generally require competing consolidators to register on Form CC
and make amendments to an effective Form CC prior to implementing a
material change to the pricing, connectivity or products offered and
annually to correct information that has become inaccurate or
incomplete for any reason. The information collected in Form CC would
be used to help assure that a competing consolidator's disclosures
comply with the requirements of proposed Rule 614 and so that specified
information would be made publicly available and could be used to
evaluate competing consolidators. The information required under
proposed Rule 614(a)(1) also would be used by the Commission to
determine whether to declare ineffective an initial Form CC filed by a
competing consolidator.
Proposed Rule 614(a)(3) would require a competing consolidator to
[[Page 16799]]
provide notice of its cessation of operations on Form CC at least 30
business days prior to the date the competing consolidator will cease
to operate as a competing consolidator. This information would be used
by the Commission to monitor and oversee competing consolidators and
would provide notice to the public that the competing consolidator
intends to cease operations.
2. Competing Consolidator Duties and Data Collection
Under the proposed decentralized consolidation model, proposed
Rules 614(d)(1)-(d)(3) would require the competing consolidators to
collect from the SROs quotation and transaction information for NMS
stocks, calculate and generate consolidated market data, as proposed,
from this information, and make such consolidated market data available
on terms that are not unreasonably discriminatory to subscribers. The
information that would be collected under these provisions is a
critical element of the U.S. national market system, and the
availability of this information would promote fair and efficient
markets and facilitate the ability of brokers and dealers to trade more
effectively and to provide best execution to their customers.
Proposed Rule 614(d)(4) would require competing consolidators to
timestamp the information with respect to quotations and transactions
in NMS stocks that they collect from the SROs pursuant to proposed Rule
614(d)(1) upon receipt, upon receipt by the aggregation mechanism, and
upon dissemination to subscribers. This information would be used by
subscribers to determine a competing consolidator's realized latency
and should assist subscribers in choosing a competing consolidator or
in deciding whether the chosen competing consolidator continues to meet
their latency needs.
Proposed Rule 614(c) would require each competing consolidator to
make public on its website a direct URL hyperlink to the Commission's
website that contains each effective initial Form CC, order of
ineffective initial Form CC, and amendments to effective Form CCs.
These proposed requirements will help to assure that information
regarding competing consolidators is readily available.
3. Recordkeeping
Proposed Rule 614(d)(7) would require each competing consolidator
to keep and preserve at least one copy of all documents made or
received by it in the course of its business and in the conduct of its
business. These documents must be kept for a period of no less than
five years, the first two years in an easily accessible place. Proposed
Rule 614(d)(8) would require each competing consolidator to promptly
furnish these documents to any representative of the Commission upon
request. This information would facilitate the Commission's oversight
of competing consolidators.
4. Reports and Reviews
Proposed Rules 614(d)(5) and (d)(6) would require the monthly
publication, on a competing consolidator's website, of metrics and
other information concerning the competing consolidator's performance
and operations. This information would include, among other things,
latency statistics, system availability, data quality problems, and
clock drift information. The information must be publicly posted and
must remain free and accessible (without any encumbrances or
restrictions) by the general public on the website for a period of not
less than three years from the initial date of posting. These proposed
rules would provide transparency with respect to the services and
performance of a competing consolidator, which would allow market
participants to evaluate the merits of a competing consolidator.
5. Amendment to the Effective National Market System Plan(s) for NMS
Stocks
As discussed above, the effective national market system plan(s)
for NMS stocks would need to be updated and would be required to
include specified new provisions. Accordingly, the participants would
be required to file an amendment or amendments to the plans to reflect
the new role and functions of the plan(s). For example, the proposed
amendment would need to reflect that the plan(s) is (are) no longer
operating the exclusive SIPs. In addition, the amendment would reflect
the new fees for consolidated market data as well as the approach to
billing protocols, including an MISU policy. In addition, the
participants to the plan(s) would need to file an amendment to define
the monthly performance metrics of competing consolidators. The
information that would be collected pursuant to the proposed plan(s)
amendment would inform market participants of the proposed operation of
the effective national market system plan(s) for NMS stocks and
facilitate the Commission's ability to oversee the national market
system for NMS stocks. The information that would be collected pursuant
to the proposed plan(s) amendment would also inform competing
consolidators of the monthly performance metrics that they would be
required to develop. The amendment or amendments would be published for
public comment.
(a) Proposed Application of Timestamps (Rule 614(e)(1)(iii))
As noted above, timestamps are used extensively in reporting market
data elements. Timestamps are used to properly sequence events and are
necessary for the elements of consolidated market data, as proposed.
Timestamps also help to measure latencies with the provision of
proposed consolidated market data. The lack of timestamps would impair
the usefulness of the data and would impair market participants'
ability to measure the latencies involved with the provision of
proposed consolidated market data. Accordingly, the Commission
preliminarily believes that the timestamp information that would be
collected pursuant to the effective national market system plan(s)
would be used by competing consolidators and self-aggregators to
properly sequence core data elements and measure latencies relating to
the collection, calculation and generation of core data.\659\
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\659\ In addition, the proposed timestamps would be used by
competing consolidators to generate the monthly performance metrics
pursuant to proposed Rule 614(d)(5).
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(b) Proposed Annual Report (Rule 614(a)(2)(ii))
The proposed assessment of competing consolidators' performance and
the proposed annual report would be used by the Commission to analyze
and oversee the operation of the effective national market system
plan(s) for the provision of proposed consolidated market data in NMS
stocks. The annual report would contain useful information for
measuring the promptness, accuracy and reliability of the competing
consolidator model. As noted above, the provision of consolidated
market data is a necessary part of the national market system and the
annual report would be useful in assessing its operation.
(c) Proposed List of Primary Listing Markets (Rule 614(e)(1)(iv))
The proposed list of the primary listing market for each NMS stock
would be used by the Commission to oversee the development and
provision of proposed regulatory data. In addition, the list would be
used by primary listing exchanges to identify which primary listing
exchange is responsible for making Short Sale Circuit Breaker
[[Page 16800]]
information available pursuant to Rule 201(b)(3) is clearly identified.
6. Collection and Dissemination of Information by National Securities
Exchanges and National Securities Associations
As discussed above, the proposed amendment to Rule 603(b) would
require every national securities exchange on which an NMS stock is
traded and national securities association to make available to all
competing consolidators and self-aggregators all information with
respect to quotations for and transactions in NMS stocks, including all
data necessary to generate consolidated market data, as proposed, in
the same manner and using the same methods, including all methods of
access and using the same format, as such exchange or association makes
available any information with respect to quotations for and
transactions in NMS stocks to any person. In addition, as proposed, the
primary listing exchange would have to collect and make available
pursuant to Rule 603(b) information required under Rule 201 of
Regulation SHO. Moreover, the primary listing exchange with the largest
proportion of stocks included in the S&P 500 Index would need to
monitor the index throughout the trading day. Therefore, to comply with
this provision, the SROs would have to collect all elements of
consolidated market data. The competing consolidators would
consolidate, process, and sell to their customers these data regarding
NMS stock quotations and transactions. The data will also be used by
self-aggregators to trade and provide services to their customers.
C. Respondents
The collection of information in the proposed changes to Rule
603(b) would apply to the sixteen national securities exchanges (that
are equity securities exchanges) and the one national securities
association (Financial Industry Regulatory Authority, Inc.) that are
registered with the Commission. The amendment to the effective national
market system plan(s) for NMS stocks would apply to these sixteen
national securities exchanges and the one national securities
association (Financial Industry Regulatory Authority, Inc.) that are
registered with the Commission and that are participants in the
effective national market system plan(s) for NMS stocks.\660\ In
addition, the proposed information collections regarding registration
requirements and Form CC, competing consolidator duties and data
collection, recordkeeping, reports and reviews, and policies and
procedures as contemplated in proposed Rule 614 would apply to those
entities that register under the process in proposed Rule 614 to become
competing consolidators. The Commission preliminarily estimates that
there would initially be 12 persons who decide to perform the functions
of a competing consolidator that would have to comply with the proposed
information collections.
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\660\ Currently, these national securities exchanges are: Cboe
BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange,
Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc., Investors
Exchange LLC, Long-Term Stock Exchange, Inc., Nasdaq BX, Inc.,
Nasdaq ISE, LLC, Nasdaq PHLX LLC, Nasdaq Stock Market LLC, New York
Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE
Chicago, Inc., and NYSE National, Inc. The primary listing exchanges
responsible for making Short Sale Circuit Breaker information
available pursuant to Rule 201(b)(3) would be identified in the
effective national market system plan(s).
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D. Total Annual Reporting and Recordkeeping Burden
1. Registration Requirements and Form CC
(a) Initial Burden and Costs
As discussed above, proposed Rule 614(a)(1) would require competing
consolidators to register with the Commission by filing electronically
new Form CC in accordance with the instructions to the Form CC. For
purposes of the PRA, the Commission preliminarily estimates that it
will take 200 hours to complete the initial Form CC with the
information required, including all exhibits to Form CC. The Commission
based this estimate on the number of hours necessary to complete Form
SIP because Form CC was generally based on Form SIP and incorporated
many of the provisions of Form SIP.\661\ In addition, the Commission
estimates that each competing consolidator would initially designate
two individuals to access EFFS, with each application to access EFFS
taking 0.15 hours for a total of 0.3 hours per competing consolidator.
Therefore, the Commission estimates that it would take 200.3 hours to
complete the Form CC and gain access to EFFS.
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\661\ The Commission estimated that completing Form SIP, which
includes 20 exhibits, would take 400 hours. See Securities Exchange
Act Release No. 63347 (Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010)
(``The Commission calculated in 2008 that Form SIP takes 400 hours
to complete.''). Proposed Form CC includes 9 exhibits, so the
Commission preliminarily estimates that completing proposed Form CC
would take 200 hours.
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As noted above, the Commission preliminarily estimates that 12
respondents would be subject to this burden, however, as noted above,
SROs are not required to file Form CC.\662\ Therefore, there would be 8
respondents (the Commission preliminarily estimates that 4 SROs would
also act as competing consolidators). Accordingly, the Commission
estimates that the one-time initial registration burden for all
competing consolidators is approximately 1,602.4 burden hours.\663\ The
Commission estimates that competing consolidators will, as a general
matter, prepare Form CC internally and not use external service
providers to complete the form. It is likely that Form CC would be
prepared by an attorney, and, with approximately 1,602.4 burden hours
for all competing consolidators, the total cost to register all
competing consolidators would be $748,320.80.\664\ In addition, the
Commission estimates that each respondent would designate two
individuals to sign the Form CC. An individual signing the Form CC must
obtain a digital ID, at the cost of approximately $25 each year.
Therefore, each respondent would expend approximately $50 annually to
obtain digital IDs for the individuals with access to EFFS for the
purposes of signing the Form CC \665\ or approximately $400 for all
respondents.\666\
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\662\ See supra note 537.
\663\ The hour figure is based on 200.3 hours x an estimated 8
competing consolidators. The Commission preliminarily believes that
additional competing consolidators may register from time to time
and would be subject to a similar one-time initial registration
burden.
\664\ The Commission based this estimate on the $467 hourly rate
as of May 2019 for an assistant general counsel x 200.3 hours x 8
respondents. The Commission derived this estimate based on per hour
figures from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, modified by Commission staff to account
for an 1,800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead.
Burden estimates may vary to the extent that competing consolidators
utilize external service providers or outside counsel. The
Commission preliminarily believes that competing consolidators would
use in-house counsel and not use external service providers or
outside counsel to file the Form CC.
\665\ $25 per digital ID x 2 individuals = $50 per respondent.
\666\ $50 per respondent x 8 total respondents = $400.
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As discussed below, the Commission believes that amendments to Form
CC represent the ongoing annual burdens of Form CC and proposed Rule
614(a)(2). The Commission preliminarily estimates that competing
consolidators may file two amendments--one Material Amendment and one
Annual Report--during its first year after the
[[Page 16801]]
effectiveness of its Form CC. As discussed below, the ongoing annual
burden for complying with these amendment requirements will be
approximately 6.0 burden hours for each competing consolidator per
amendment \667\ (for a total of $2,802), and approximately 48 burden
hours for all competing consolidators per amendment (for a total of
$22,416).\668\ Therefore, the Commission preliminarily estimates that
each respondent will have an average annual burden of 12.0 hours (for a
total of $5,604) for a total estimated average annual burden of 96
hours (for a total of $44,832).\669\ As with the initial Form CC, the
Commission believes the competing consolidators will conduct this work
internally.
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\667\ When Form SDR was adopted in 2015, the Commission
estimated the hour burden for amendments to be roughly 3% of the
initial burden. Securities Exchange Act Release No. 74246, supra
note 554, at 14522. In that release, the initial burden was
calculated to be 400 hours per respondent and 12 hours per
respondent for amendments. The Commission believes that a similar
ratio will apply to filers of Form CC because filers of Form SDR,
like filers of Form CC, are required to file amendments annually as
well as when certain information on Form SDR becomes inaccurate.
Form SDR: General Instructions for Preparing and Filing Form SDR,
available at https://www.sec.gov/about/forms/formsdr.pdf (last
accessed Jan. 8, 2020). Thus, the Commission estimates that the
annual burden of filing one amendment on Form CC will be 3% of the
200 hour initial burden, or 6 hours.
\668\ See supra note 664.
\669\ See id.
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(b) Ongoing Burden and Costs
As discussed above, proposed Rule 614(a)(2) would require competing
consolidators to amend Form CC prior to the implementation of material
changes to pricing, connectivity, or products offered as well as
annually to correct information that has become inaccurate or
incomplete for any reason. On an ongoing basis, each competing
consolidator may add one individual to access the EFFS system for
amendments, adding 0.15 hours per competing consolidator.\670\ The
Commission believes that these amendments represent the ongoing annual
burdens of Form CC and proposed Rule 614(a)(2). The Commission
preliminarily estimates that the ongoing annual burden for complying
with these amendment requirements will be approximately 6.15 burden
hours for each competing consolidator per amendment \671\ (for a total
of $2,872.05), and approximately 49.2 burden hours for all competing
consolidators per amendment (for a total of $22,976.40).\672\
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\670\ For example, a competing consolidator may have to add an
individual to access EFFS to account for staffing changes.
\671\ When Form SDR was adopted in 2015, the Commission
estimated the hour burden for amendments to be roughly 3% of the
initial burden. Securities Exchange Act Release No. 74246, supra
note 554, at 14522. In that release, the initial burden was
calculated to be 400 hours per respondent and 12 hours per
respondent for amendments. The Commission believes that a similar
ratio will apply to filers of Form CC because filers of Form SDR,
like filers of Form CC, are required to file amendments annually as
well as when certain information on Form SDR becomes inaccurate.
Form SDR: General Instructions for Preparing and Filing Form SDR,
available at https://www.sec.gov/about/forms/formsdr.pdf (last
accessed Jan. 8, 2020). Thus, the Commission estimates that the
annual burden of filing one amendment on Form CC will be 3% of the
200 hour initial burden, or 6 hours.
\672\ See supra note 664.
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The Commission preliminarily believes that one Material Amendment
would be a reasonable estimate for the number of such amendments per
year. Thus, the Commission preliminarily estimates that respondents
will be required to file on average a total of two amendments per year,
one Material Amendment plus one Annual Report. Therefore, the
Commission preliminarily estimates that each respondent will have an
average annual burden of 12.3 hours (for a total of $5,744.10) for a
total estimated average annual burden of 98.4 hours (for a total of
$45,952.80).\673\ As with the initial Form CC, the Commission believes
the competing consolidators will conduct this work internally. Further,
as noted above, an individual signing the Form CC must obtain a digital
ID, at the cost of approximately $25 each year. Therefore, each
respondent would expend approximately $25 annually to obtain digital
IDs for the individuals with access to EFFS for the purposes of signing
the Form CC or approximately $200 for all respondents. Thus, the
Commission preliminary estimates that each respondent will have an
average annual cost of $5,769.10 ($5,744.10 + $25) and a total
estimated annual cost of $46,152.80 ($5,769.10 * 8).
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\673\ See id.
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As discussed above, proposed Rule 614(a)(3) would permit a
competing consolidator to cease acting as a competing consolidator by
filing an amendment to Form CC 30 business days before the proposed
cessation of acting as a competing consolidator. The Commission
preliminarily believes that a competing consolidator's notice of
cessation of acting as a competing consolidator on Form CC will be
substantially similar to its most recently filed Form CC. The Form CC
being filed in this circumstance will therefore already be
substantially complete and as a result, the burden will not be as great
as the burden of filing an application for registration on Form CC.
Rather, the Commission preliminarily believes that the burden of filing
a notice of cessation of acting as a competing consolidator on Form CC
will be akin to filing an amendment on Form CC. Thus, the Commission
estimates that the one-time burden of filing Form CC to notice
cessation of acting as a competing consolidator will be approximately 2
burden hours (for a total of $934).\674\
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\674\ See id. The Commission preliminarily estimates that no
competing consolidators would cease operation in the first three
years of the rule's effectiveness.
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2. Competing Consolidator Duties and Data Collection
As discussed above, proposed Rules 614(d)(1)-(d)(3) would require
the competing consolidators to collect from the SROs quotation and
transaction information for NMS stocks, calculate and generate proposed
consolidated market data from this information, and make proposed
consolidated market data available to subscribers on a consolidated
basis on terms that are not unreasonably discriminatory. Proposed Rule
614(d)(4) would require competing consolidators to timestamp the
information with respect to quotations and transactions in NMS stocks
that they collect from the SROs pursuant to proposed Rule 614(d)(1)
upon receipt, upon receipt by the aggregation mechanism, and upon
dissemination to subscribers. The Commission preliminarily believes
that five types of entities may register to become competing
consolidators and would have to build systems, or modify existing
systems, that comply with Rules 614(d)(1)-(d)(4): (1) Market data
aggregation firms, (2) broker-dealers that currently aggregate market
data for internal uses, (3) the existing exclusive SIPs (CTA/CQ and
Nasdaq UTP SIPs), (4) entities that would be entering the market data
aggregation business for the first time (``new entrants''), and (5)
SROs. The Commission preliminarily estimates that, apart from the SRO
category, two respondents from each category may register to become a
competing consolidator; the Commission preliminarily believes that four
SROs may register to become competing consolidators.\675\
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\675\ The Commission preliminarily believes that these SROs may
be a national securities association and equities national
securities exchanges that do not currently operate an exclusive SIP.
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(a) Initial Burden Hours and Costs for Market Data Aggregation Firms
There are a number of technology firms that provide proprietary
market data aggregation services. The Commission preliminarily believes
that
[[Page 16802]]
some of these firms may choose to become competing consolidators
because they currently collect, consolidate and disseminate market data
to their customers, much like competing consolidators would. The
systems used by these firms already collect, consolidate and
disseminate more extensive proprietary market data than the data that
is provided by the exclusive SIPs. Therefore, the Commission
preliminarily believes that firms providing proprietary market data
aggregation services would not have to extensively modify their systems
to comply with Rules 614(d)(1)-(d)(4). For example, the Commission
preliminarily believes that each market data aggregation firm would
incur burden hours to expand their bandwidth to receive information
that is not currently disseminated in the exchange proprietary market
data feeds, such as the proposed regulatory data and administrative
data, and may incur external costs to purchase hardware to receive such
added information.
The Commission preliminarily believes that each market data
aggregation firm that chooses to become a competing consolidator would
incur initial burden hours to upgrade its systems to comply with Rules
614(d)(1)-(d)(4) in order to collect, consolidate and disseminate the
proposed consolidated market data. The Commission also preliminarily
believes that each market data aggregation firm would incur initial
external costs associated with such upgrades, including co-location
fees at the exchange data centers and the cost of market data.
The Commission preliminarily believes that each market data
aggregation firm would incur 900 initial burden hours \676\ and
$206,250 in external costs \677\ to modify its systems to comply with
Rules 614(d)(1)-(d)(4). Additionally, the Commission estimates that an
existing market data aggregator would incur initial external costs of
$14,000 to purchase market data from the SROs,\678\ and an additional
initial external cost of $194,000 to co-locate at four exchange data
centers,\679\ for a total initial external cost of $414,250 per
existing market data aggregator,\680\ and an aggregate estimate of
1,800 initial burden hours \681\ and $828,500 in initial external
costs.\682\ The Commission solicits comment on the accuracy of this
information.
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\676\ The Commission estimates the monetized initial burden for
this requirement to be $293,750. Based on discussions with a market
participant, the Commission reached the following estimates: [(Sr.
Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at
$285/hour for 300 hours) + (Compliance Manager at $310/hour for 100
hours) + (Director of Compliance at $489/hour for 50 hours) +
(Compliance Attorney at $366/hour for 100 hours)] = 6 months (900
burden hours) to upgrade existing systems to comply with Rules
614(d)(1)-(d)(4). The Commission derived this estimate based on per
hour figures from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, modified by Commission staff to account
for an 1,800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead.
\677\ This estimate is based on discussions with a market
participant and the Commission's understanding of hardware costs.
\678\ The Commission is using the monthly market data access and
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq
UTP SIP as the basis of this estimate ($14,000).
\679\ This estimate is based on an estimated $48,500 in initial
co-location fees as calculated from NYSE Price List 2020, multiplied
by four exchange data centers. The Commission preliminarily believes
that the market data aggregators would already be co-located at the
four exchange data centers, which may lower this estimate. See NYSE
Price List 2020, supra note 408.
\680\ $414,250 = [($206,250 in initial external costs to modify
systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 for the
first month of market data costs) + ($194,000 in initial co-location
costs at four exchange data centers)].
\681\ The Commission estimates the monetized initial burden for
this requirement to be $587,500. Based on discussions with a market
participant, the Commission reached the following estimates: [(Sr.
Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at
$285/hour for 300 hours) + (Compliance Manager at $310/hour for 100
hours) + (Director of Compliance at $489/hour for 50 hours) +
(Compliance Attorney at $366/hour for 100 hours)] x [(2 market data
aggregation firms)] = 1,800 initial burden hours across the market
data aggregation firms.
\682\ The Commission preliminarily estimates that the market
data aggregation firms would incur the following initial external
costs: [($206,250 to modify systems to comply with Rules 614(d)(1)-
(d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate
within four exchange data centers)] x [(2 market data aggregation
firms)] = $828,500.
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(b) Initial Burden Hours and Costs for Broker-Dealers That Aggregate
Market Data
The Commission preliminarily believes that some broker-dealers that
currently aggregate market data for their own internal uses may choose
to become competing consolidators. The systems used by such broker-
dealers already collect and consolidate the proprietary feeds from the
exchanges, which contain more extensive data than the data provided by
the exclusive SIPs. Therefore, Commission preliminarily believes that
these firms may not have to extensively modify their systems to comply
with Rules 614(d)(1)-(d)(4). For example, the Commission preliminarily
believes that each broker-dealer would incur burden hours to expand
their bandwidth to receive information that is not currently
disseminated in the exchange proprietary market data feeds, such as
data from the OTC market, the proposed regulatory data and
administrative data and may incur external costs to purchase hardware
to receive such added information. In addition, these broker-dealers
would incur burden hours to disseminate proposed consolidated market
data to subscribers. The Commission estimates that the initial burden
hour and external costs estimates for these broker-dealers to modify
their systems to comply with Rules 614(d)(1)-(d)(4) would be similar to
market data aggregation firms because, for both types of respondents,
the scope of the systems changes and costs associated with becoming
competing consolidators would be comparable.
The Commission preliminarily believes that each broker-dealer that
aggregates market data for internal uses that chooses to become a
competing consolidator would incur burden hours to upgrade its systems
to comply with Rules 614(d)(1)-(d)(4) in order to collect, consolidate,
and disseminate the proposed consolidated market data. The Commission
also preliminarily believes that each broker-dealer would also incur
initial external costs associated with such upgrades, including co-
location fees at the exchange data centers and the cost of market data.
The Commission preliminarily believes that each broker-dealer would
incur 900 initial burden hours \683\ and $206,250 in external costs
\684\ to modify its systems to comply with Rules 614(d)(1)-(d)(4).
Additionally, the Commission estimates that a broker-dealer would incur
initial external costs of $14,000 to purchase market data from the
SROs,\685\ and an additional initial external cost of $194,000 to co-
locate itself at four exchange data centers,\686\
[[Page 16803]]
for a total initial external cost of $414,250 per broker-dealer,\687\
and an aggregate estimate of 1,800 initial burden hours \688\ and
$828,500 in initial external costs.\689\ The Commission solicits
comment on the accuracy of this information.
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\683\ The Commission estimates the monetized initial burden for
this requirement to be $293,750. Based on discussions with a market
participant, the Commission reached the following estimates: [(Sr.
Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at
$285/hour for 300 hours) + (Compliance Manager at $310/hour for 100
hours) + (Director of Compliance at $489/hour for 50 hours) +
(Compliance Attorney at $366/hour for 100 hours)] = 6 months (900
burden hours) to upgrade existing systems to comply with Rules
614(d)(1)-(d)(4). The Commission derived this estimate based on per
hour figures from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, modified by Commission staff to account
for a 1,800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead.
\684\ This estimate is based on discussions with a market
participant and the Commission's understanding of hardware costs.
\685\ The Commission is using the monthly market data access and
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq
UTP SIP as the basis of this estimate ($14,000).
\686\ This estimate is based on an estimated $48,500 in initial
co-location fees as calculated from NYSE Price List 2020, multiplied
by four exchange data centers. See NYSE Price List 2020, supra note
408.
\687\ $414,250 = [($206,250 in initial external costs to modify
systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 for the
first month of market data costs) + ($194,000 in initial co-location
costs at four exchange data centers)].
\688\ The Commission estimates the monetized initial burden for
this requirement to be $587,500. Based on discussions with a market
participant, the Commission reached the following estimates: [(Sr.
Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at
$285/hour for 300 hours) + (Compliance Manager at $310/hour for 100
hours) + (Director of Compliance at $489/hour for 50 hours) +
(Compliance Attorney at $366/hour for 100 hours)] x [(2 broker-
dealers)] = 1,800 initial burden hours across the broker-dealers.
\689\ The Commission preliminarily estimates that broker-dealers
would incur the following initial external costs: [($206,250 to
modify systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to
purchase market data) + ($194,000 to co-locate within four exchange
data centers) x (2 broker-dealers)] = $828,500.
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(c) Initial Implementation Burden Hours and Costs for the Exclusive
SIPs
The Commission preliminarily believes that the CTA/CQ SIP and the
Nasdaq UTP SIP could choose to become competing consolidators due to
their years of experience in collecting, consolidating and
disseminating market data. The systems used by the exclusive SIPs
already collect, consolidate and disseminate SIP data. Therefore, the
Commission preliminarily believes that the exclusive SIPs would not
have to build entirely new systems to comply with Rules 614(d)(1)-
(d)(4). For example, each exclusive SIP would incur burden hours and
external costs to expand their bandwidth and connections to consume and
disseminate proposed consolidated market data as well as to transmit
it, and to program feed handlers to receive and normalize the different
formats of the data feeds developed by the exchanges.\690\ Further,
each exclusive SIP would expend external costs on purchasing proposed
consolidated market data and on colocation fees at the exchange data
centers.
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\690\ Feed handlers receive market data and make it usable to
customers.
---------------------------------------------------------------------------
However, the exclusive SIPs may have to make a greater scope of
changes to become competing consolidators than market data aggregation
firms. For this reason, the Commission has estimated initial burden
hour and external cost estimates that are higher than those estimated
for market data aggregation firms.
The Commission preliminarily believes that each exclusive SIP would
incur burden hours to upgrade their systems to comply with Rules
614(d)(1)-(d)(4) to collect, consolidate and disseminate the proposed
consolidated market data. The Commission also preliminarily believes
that each exclusive SIP would also incur external costs associated with
such upgrades, including co-location fees at the exchange data centers
and the cost of market data. The Commission preliminarily believes that
each exclusive SIP would incur 1,800 initial burden hours \691\ and
$412,500 in external costs \692\ to modify its systems to comply with
Rules 614(d)(1)-(d)(4). Additionally, the Commission estimates that an
exclusive SIP would incur initial external costs of $14,000 to purchase
market data from the SROs,\693\ and an additional initial external cost
of $194,000 to co-locate itself at four exchange data centers,\694\ for
a total initial external cost of $620,500 per existing SIP,\695\ and an
aggregate estimate of 3,600 initial burden hours \696\ and $1,241,000
in initial external costs.\697\ The Commission solicits comment on the
accuracy of this information.
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\691\ Based on discussions with a market participant, the
Commission reached the following estimates for a market data
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) +
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance
Manager at $310/hour for 100 hours) + (Director of Compliance at
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100
hours)] = 6 months (900 burden hours) to upgrade existing systems to
comply with Rules 614(d)(1)-(d)(4). The Commission derived this
estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for a 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. As noted above, the Commission has
increased this initial burden hour estimate for the exclusive SIPs.
Therefore, the Commission preliminarily estimates that each
exclusive SIP will incur 1,800 initial burden hours to upgrade its
existing systems to comply with Rules 614(d)(1)-(d)(4) (or $587,500,
as monetized).
\692\ As noted above, the Commission estimates the initial
external cost estimates to comply with Rules 614(d)(1)-(d)(4) will
be higher for exclusive SIPs than for market data aggregation firms.
Therefore, the Commission preliminarily estimates that each existing
SIP will incur $412,500 in initial external costs to modify its
systems to comply with Rules 614(d)(1)-(d)(4).
\693\ The Commission is using the monthly market data access and
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq
UTP SIP as the basis of this estimate ($14,000).
\694\ This estimate is based on an estimated $48,500 in initial
co-location fees as calculated from NYSE Price List 2020, multiplied
by four exchange data centers. See NYSE Price List 2020, supra note
408.
\695\ The Commission preliminarily estimates that each existing
SIP would incur the following initial external costs: [($412,500 to
modify systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to
purchase market data) + ($194,000 to co-locate within four exchange
data centers)] = $620,500.
\696\ Based on discussions with a market participant, the
Commission reached the following estimates for a market data
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) +
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance
Manager at $310/hour for 100 hours) + (Director of Compliance at
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100
hours)] = 900 initial burden hours across the market data
aggregation firms. As noted above, the Commission has increased this
initial burden hour estimate to apply to the exclusive SIPs.
Therefore, the Commission preliminarily estimates that each
exclusive SIP will incur 1,800 initial burden hours to upgrade its
existing systems to comply with Rules 614(d)(1)-(d)(4) (or $587,500,
as monetized). The aggregate initial burden hour estimate for two
exclusive SIPs would be [(1,800 initial burden hours) x (2 existing
SIPs)] = 3,600 initial burden hours.
\697\ The Commission preliminarily estimates that the exclusive
SIPs would incur the following initial external costs: [($412,500 to
modify systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to
purchase market data) + ($194,000 to co-locate within four exchange
data centers)] x [(2 exclusive SIPs)] = $1,241,000.
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(d) Initial Implementation Burden Hours and Costs for New Entrants
The Commission anticipates that firms without prior experience in
the business of collecting, consolidating and disseminating market data
may choose to become competing consolidators and would have to build
systems to comply with Rules 614(d)(1)-(d)(4). Because these systems
would be completely new, the Commission preliminarily believes that
these new entrants will incur substantially higher initial burden hours
and external costs to build a system that complies with Rules
614(d)(1)-(d)(4) than the other entities described above. For this
reason, the Commission has estimated initial burden hour and external
cost estimates for new entrants that are higher than those estimated
for the other potential entities that may choose to become competing
consolidators. The Commission preliminarily believes that each new
entrant would incur initial burden hours to comply with Rules
614(d)(1)-(d)(4) to build a system that collects, consolidates, and
disseminates the proposed consolidated market data. The Commission also
preliminarily believes that each new entrant would incur associated
external costs, including co-location fees at the exchange data centers
and the cost of market data. The Commission preliminarily believes that
each new entrant would incur 3,600 initial burden hours \698\ and
$825,000 in external
[[Page 16804]]
costs \699\ to build systems to comply with Rules 614(d)(1)-(d)(4).
Additionally, the Commission estimates that a new entrant would incur
initial external costs of $14,000 to purchase market data from the
SROs,\700\ and an additional initial external cost of $194,000 to co-
locate itself at four exchange data centers,\701\ for a total initial
external cost of $1,033,000 per new entrant,\702\ and an aggregate
estimate of 7,200 initial burden hours \703\ and $2,066,000 in initial
external costs.\704\ The Commission solicits comment on the accuracy of
this information.
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\698\ Based on discussions with a market participant, the
Commission reached the following estimates for a market data
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) +
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance
Manager at $310/hour for 100 hours) + (Director of Compliance at
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100
hours)] = 6 months (900 burden hours) to upgrade existing systems to
comply with Rules 614(d)(1)-(d)(4). The Commission derived this
estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. As noted above, the Commission has
increased this initial burden hour estimate to apply to the new
entrants. Therefore, the Commission preliminarily estimates that
each new entrant will incur 3,600 initial burden hours to build
systems to comply with Rules 614(d)(1)-(d)(4) (or $1,175,000, as
monetized).
\699\ As noted above, the Commission has increased its initial
external cost estimates for market data aggregation firms to apply
to new entrants. Therefore, the Commission preliminarily estimates
that each new entrant will incur $825,000 in initial external costs
to build systems to comply with Rules 614(d)(1)-(d)(4).
\700\ The Commission is using the monthly market data access and
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq
UTP SIP as the basis of this estimate ($14,000).
\701\ This estimate is based on an estimated $48,500 in initial
co-location fees as calculated from NYSE Price List 2020, multiplied
by four exchange data centers. See NYSE Price List 2020, supra note
408.
\702\ The Commission preliminarily estimates that each new
entrant would incur the following initial external costs: [($825,000
to build systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000
to purchase market data) + ($194,000 to co-locate within four
exchange data centers)] = $1,033,000.
\703\ Based on discussions with a market participant, the
Commission reached the following estimates for a market data
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) +
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance
Manager at $310/hour for 100 hours) + (Director of Compliance at
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100
hours)] = 900 initial burden hours. As noted above, the Commission
has increased the per market data aggregation firm initial burden
hour estimate to apply to the new entrants. Therefore, the
Commission preliminarily estimates that each existing SIP will incur
3,600 initial burden hours to upgrade its existing systems to comply
with Rules 614(d)(1)-(d)(4) (or $1,175,000, as monetized). [(3,600
burden hours) x (2 new entrants] = 7,200 hours (or $2,350,000 as
monetized).
\704\ The Commission preliminarily estimates that each new
entrant would incur the following initial external costs: [($825,000
to build systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000
to purchase market data) + ($194,000 to co-locate within four
exchange data centers) x (2 new entrants)] = $1,033,000.
[($1,033,000 in initial external costs) x (2 new entrants)] =
$2,066,000.
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(e) Initial Implementation Burden Hours and Costs for SROs
The Commission anticipates that SROs may choose to become competing
consolidators and would have to build new systems to comply with Rules
614(d)(1)-(d)(4). Although these SROs may be able to leverage existing
systems in developing a system compliant with Rules 614(d)(1)-(d)(4),
the Commission preliminarily believes that these SROs would likely have
to build new systems and thus will incur initial burden hours to comply
with Rules 614(d)(1)-(d)(4) that are similar to new entrants. The
Commission preliminarily believes that each SRO would incur initial
burden hours to comply with Rules 614(d)(1)-(d)(4) to build a system
that collects, consolidates, and disseminates the proposed consolidated
market data. The Commission also preliminarily believes that each SRO
would incur associated external costs, including co-location fees at
the exchange data centers and the cost of market data. The Commission
preliminarily believes that each SRO would incur 3,600 initial burden
hours \705\ and $825,000 in external costs \706\ to build systems to
comply with Rules 614(d)(1)-(d)(4). Additionally, the Commission
estimates that an SRO would incur initial external costs of $14,000 to
purchase market data from the SROs,\707\ and an additional initial
external cost of $194,000 to co-locate itself at four exchange data
centers,\708\ for a total initial external cost of $1,033,000 per new
entrant,\709\ and an aggregate estimate of 14,400 initial burden hours
\710\ and $4,132,000 in initial external costs.\711\ The Commission
solicits comment on the accuracy of this information.
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\705\ Based on discussions with a market participant, the
Commission reached the following estimates for a market data
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) +
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance
Manager at $310/hour for 100 hours) + (Director of Compliance at
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100
hours)] = 6 months (900 burden hours) to upgrade existing systems to
comply with Rules 614(d)(1)-(d)(4). The Commission derived this
estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. As it did for its new entrant
estimates, the Commission has increased this initial burden hour
estimate to apply to the SROs. Therefore, the Commission
preliminarily estimates that each new entrant will incur 3,600
initial burden hours to build systems to comply with Rules
614(d)(1)-(d)(4) (or $1,175,000, as monetized).
\706\ As it did for its new entrant estimates, the Commission
has increased its initial external cost estimates for market data
aggregation firms to apply to the SROs. Therefore, the Commission
preliminarily estimates that each SRO will incur $825,000 in initial
external costs to build systems to comply with Rules 614(d)(1)-
(d)(4).
\707\ The Commission is using the monthly market data access and
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq
UTP SIP as the basis of this estimate ($14,000).
\708\ This estimate is based on an estimated $48,500 in initial
co-location fees as calculated from NYSE Price List 2020, multiplied
by four exchange data centers. See NYSE Price List 2020, supra note
408.
\709\ The Commission preliminarily estimates that each SRO would
incur the following initial external costs: [($825,000 to build
systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to
purchase market data) + ($194,000 to co-locate within four exchange
data centers)] = $1,033,000.
\710\ Based on discussions with a market participant, the
Commission reached the following estimates for a market data
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) +
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance
Manager at $310/hour for 100 hours) + (Director of Compliance at
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100
hours)] = 900 initial burden hours. As it did for its new entrant
estimates, the Commission has increased the per market data
aggregation firm initial burden hour estimate to apply to the SROs.
Therefore, the Commission preliminarily estimates that each SRO will
incur 3,600 initial burden hours to upgrade its existing systems to
comply with Rules 614(d)(1)-(d)(4) (or $1,175,000, as monetized).
[(3,600 burden hours) x (4 new entrants] = 14,400 hours (or
$4,700,000 as monetized).
\711\ The Commission preliminarily estimates that each SRO would
incur the following initial external costs: [($825,000 to build
systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to
purchase market data) + ($194,000 to co-locate within four exchange
data centers)] = $1,033,000. [($1,033,000 in initial external costs)
x (4 new entrants)] = $4,132,000.
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(f) Ongoing Burden Hours and Costs for Market Data Aggregation Firms,
Broker-Dealers That Aggregate Market Data, Exclusive SIPs, New
Entrants, and SROs
The Commission preliminarily believes that once a competing
consolidator's system has been built, the entities that have become
competing consolidators (originally, the existing market data
aggregation firms, broker-dealers that aggregate market data, exclusive
SIPs, new entrants, and SROs) will incur annual ongoing burden hours
and external costs to operate and maintain their systems to comply with
Rules 614(d)(1)-(d)(4). The Commission also preliminarily believes that
these annual ongoing burdens should be similar across the competing
consolidators because such systems would likely be similar in nature.
Therefore, the burden hours and costs associated with operating and
maintain a competing consolidator system should be comparable across
competing consolidators. The Commission is therefore applying the same
annual ongoing burden hour and external cost estimates across the five
types of entities that the Commission anticipates may choose to become
competing consolidators.
[[Page 16805]]
The Commission preliminarily believes that entities choosing to
become competing consolidators would incur annual ongoing burden hours
and external costs to operate and maintain their modified systems to
comply with Rules 614(d)(1)-(d)(4). The Commission preliminarily
believes that each entity would incur 540 annual ongoing burden hours
\712\ and $123,725 in annual ongoing external costs \713\ to operate
and maintain its systems to comply with Rules 614(d)(1)-(d)(4).
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\712\ The Commission preliminarily believes that once a
competing consolidator's infrastructure is in place, the burden of
operating and maintaining the infrastructure will be less than the
burdens associated with establishing the infrastructure. The
Commission estimates the monetized initial burden for this
requirement to be $176,250. The Commission derived this estimate
based on per hour figures from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified by Commission
staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead: [(Sr. Programmer at $332 for 210 hours) +
(Sr. Systems Analyst at $285 for 180 hours) + (Compliance Manager at
$310 for 60 hours) + (Director of Compliance at $489 for 30 hours) +
(Compliance Attorney at $366 for 60 hours)] = 540 burden hours per
entity and $176,250.
\713\ This estimate is based on the initial external cost
estimate for a market data aggregation firm to modify its systems to
comply with Rules 614(d)(1)-(d)(4), but reduced because the
Commission preliminarily believes that once a competing
consolidator's infrastructure is in place, the burden of operating
and maintaining the infrastructure will be less than the burdens
associated with establishing the infrastructure.
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Additionally, the Commission estimates that each entity would incur
annual ongoing external costs of $168,000 to purchase market data from
the SROs,\714\ and an additional annual ongoing external cost of
$4,602,720 to co-locate itself at four exchange data centers,\715\ for
a total annual ongoing external cost of $4,894,445 per entity.\716\
Because the Commission preliminarily believes that there will be two
entities per category of potential competing consolidators for existing
market data aggregators, broker-dealers that currently aggregate market
data, exclusive SIPs and new entrants, for each of these categories,
the aggregate estimates would amount to estimate of 1,080 annual
ongoing burden hours \717\ and $9,797,530 in annual ongoing external
costs.\718\
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\714\ The Commission is using the monthly market data access and
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq
UTP SIP as the basis of this estimate ($14,000), multiplied by 12
months.
\715\ This estimate is based on an estimated $95,890 in monthly
co-location fees as calculated from NYSE Price List 2020, multiplied
by four exchange data centers over 12 months. The Commission
preliminarily believes that the market data aggregators would
already be co-located at the four exchange data centers, which may
lower this estimate for this category of respondent. See NYSE Price
List 2020, supra note 408.
\716\ $4,894,445 = [($123,725 to operate and maintain systems to
comply with Rules 614(d)(1)-(d)(4)) + ($168,000 in monthly market
data fees over 12 months) + ($4,602,720 to co-locate within four
exchange data centers over 12 months)].
\717\ The Commission estimates the monetized annual ongoing
burden for this requirement to be $352,500. The Commission derived
this estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [(Sr. Programmer at $332 for 210
hours) + (Sr. Systems Analyst at $285 for 180 hours) + (Compliance
Manager at $310 for 60 hours) + (Director of Compliance at $489 for
30 hours) + (Compliance Attorney at $366 for 60 hours)] x [(2 market
data aggregation firms/broker-dealers that currently aggregate
market data/existing SIPs/new entrants)] = 1,080 annual ongoing
burden hours and $352,500.
\718\ The Commission preliminarily estimates that the market
data aggregation firms/broker-dealers that currently aggregate
market data for their own usage/exclusive SIPs/new entrants would
incur the following aggregate annual ongoing external costs:
[($123,725 to operate and maintain systems to comply with Rules
614(d)(1)-(d)(4)) + ($168,000 in monthly market data fees over 12
months) + ($4,602,720 to co-locate within four exchange data centers
over 12 months)] x [(2 entities)] = $9,788,890.
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Since the Commission preliminarily believes that there may be four
SROs that will choose to become competing consolidators, it is
estimating that these SROs will incur an aggregate estimate of 2,160
annual ongoing burden hours \719\ and $19,577,780 in annual ongoing
external costs.\720\ The Commission solicits comment on the accuracy of
this information.
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\719\ The Commission estimates the monetized initial burden for
this requirement to be $353,500. The Commission derived this
estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [(Sr. Programmer at $332 for 210
hours) + (Sr. Systems Analyst at $285 for 180 hours) + (Compliance
Manager at $310 for 60 hours) + (Director of Compliance at $489 for
30 hours) + (Compliance Attorney at $366 for 60 hours)] x [(4 SROs)]
= 2,160 annual ongoing burden hours across the SROs and $705,000.
\720\ The Commission preliminarily estimates that the SROs would
incur the following initial external costs: [($123,725 to operate
and maintain systems to comply with Rules 614(d)(1)-(d)(4)) +
($168,000 in monthly market data fees over 12 months) + ($4,602,720
to co-locate within four exchange data centers over 12 months)] x
[(4 SROs)] = $19,577,780 across the SROs.
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(g) Initial Burden and Costs for Proposed Rule 614(c)
As discussed above, proposed Rule 614(c) would require each
competing consolidator to make public on its website a direct URL
hyperlink to the Commission's website that contains each effective
initial Form CC, order of ineffective initial Form CC, and amendments
to effective Form CCs. The Commission preliminarily estimates an
initial burden of 0.5 hours per competing consolidator to publicly post
the Commission's direct URL hyperlink to its website upon filing of the
initial Form CC,\721\ for an aggregate initial burden of approximately
six hours for the competing consolidators to publicly post the direct
URL hyperlink to the Commission's website on their own respective
websites.\722\
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\721\ The Commission bases this estimate on a full-time
Programmer Analyst spending approximately 0.5 hours to publicly post
the URL hyperlink per competing consolidator. The Commission
estimates the monetized initial burden for this requirement to be
$120.50. The Commission derived this estimate based on per hour
figures from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, modified by Commission staff to account
for an 1,800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead:
Programmer Analyst at $241 for 0.5 hours = 0.5 initial burden hours
per competing consolidator and $120.50.
\722\ The Commission estimates the monetized initial aggregate
burden for this requirement to be $1,446. The Commission derived
this estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [(Programmer Analyst at $241 for 0.5
hours) x (12 competing consolidators)] = 6 initial burden hours
across the competing consolidators and $1,446.
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(h) Ongoing Burden and Costs for Proposed Rule 614(c)
The Commission preliminarily believes that each competing
consolidator would check the Commission's website whenever it submits
amendments to effective Form CCs to ensure that the Commission's direct
URL hyperlink that the competing consolidator has posted to its own
website remains valid. The Commission preliminarily believes that a
competing consolidator will file two amendments per year, so the
Commission preliminarily estimates that each competing consolidator
will incur an ongoing burden of 0.25 hours per amendment, or 0.5 hours
per year, to ensure that it has posted the correct direct URL hyperlink
to the Commission's website on its own website,\723\ for an aggregate
annual
[[Page 16806]]
burden of approximately six hours for the competing consolidators to do
so.\724\
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\723\ The Commission bases this estimate on a full-time
Programmer Analyst spending approximately 0.25 hours to check the
Commission's website when the competing consolidator submits an
amendment to effective Form CCs to ensure that the Commission's
direct URL hyperlink that the competing consolidator has posted to
its own website remains valid. Since the Commission preliminarily
believes that a competing consolidator would file two amendments per
year, the Commission preliminarily estimates that each competing
consolidator would incur a burden of 0.5 hours per year. [(0.25
hours) x (2 amendments per year)] = 0.5 hours per year to check the
URL hyperlink. The Commission estimates the monetized annual burden
for this requirement to be $120.50. The Commission derived this
estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: Programmer Analyst at $241 for 0.5
hours = 0.5 annual burden hours per competing consolidator and
$120.50.
\724\ The Commission estimates the monetized aggregate annual
burden for this requirement to be $1,446.00. The Commission derived
this estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [(Programmer Analyst at $241 for 0.5
hours) x (12 competing consolidators)] = 6 annual burden hours
across the competing consolidators and $1,446.00.
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3. Recordkeeping
(a) Initial Burden and Costs
Proposed Rule 614(d)(7) would require each competing consolidator
to keep and preserve at least one copy of all documents made or
received by it in the course of its business and in the conduct of its
business. These documents must be kept for a period of no less than
five years, the first two years in an easily accessible place. Proposed
Rule 614(d)(8) would require each competing consolidator to promptly
furnish these documents to any representative of the Commission upon
request. Based on the Commission's experience with recordkeeping costs
and consistent with prior burden estimates for similar provisions,\725\
the Commission preliminarily estimates that this requirement will
create an initial burden of 40 hours (for a total cost of $8,720),\726\
for a total initial burden of 480 hours for all respondents (for a
total cost of $104,640).
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\725\ See Securities Exchange Act Release No. 74246, supra note
554, at 14541.
\726\ The Commission based this estimate on the $218 hourly rate
as of May 2019 for a paralegal x 40 hours. The Commission derived
this estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead.
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(b) Ongoing Burden and Costs
The Commission preliminarily believes that the ongoing annual
burden of recordkeeping in accordance with proposed Rules 614(d)(7) and
614(d)(8) would be 20 hours per respondent (for a total cost of $4,360)
and a total ongoing annual burden of 240 hours for all respondents (for
a total cost of $52,320).
4. Reports and Reviews
(a) Initial Burden and Costs
The Commission preliminarily believes that the average one-time,
initial burden to program systems to produce the monthly reports
required by proposed Rules 614(d)(5) and (d)(6), including keeping the
information publicly posted and free and accessible (in downloadable
files under Rule 614(d)(5)), would be 246 hours per competing
consolidator (for a total cost of $80,507) \727\ and $800 in external
costs.\728\ The Commission estimates that the total initial burden
would be 2,952 hours (for a total cost of $966,804) \729\ and a total
initial external cost of $9,600.\730\
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\727\ This figure is based on the estimated initial paperwork
burden for Rule 606(a), which requires each broker or dealer to make
publicly available on a website a quarterly report on its routing of
non-directed orders in NMS stocks that are submitted on a held basis
and of non-directed orders that are customer orders in NMS
securities. See Disclosure of Order Handling Information, Securities
Exchange Act Release No. 84528, supra note 10. For purposes of this
proposal, the Commission is converting the 10 hour estimate for a
quarterly report to an estimate for a monthly report. Additionally,
the Commission is adding the burden of posting the required
information to the website. The Commission estimates the monetized
initial burden for this requirement to be $80,507. The Commission
derived this estimate based on per hour figures from SIFMA's
Management & Professional Earnings in the Securities Industry 2013,
modified by Commission staff to account for an 1,800-hour work-year
and inflation, and multiplied by 5.35 to account for bonuses, firm
size, employee benefits and overhead: [(Sr. Programmer at $332 per
hour for 160 hours) + (Sr. Database Administrator at $342 per hour
for 20 hours) + (Sr. Business Analyst at $275 per hour for 20 hours)
+ (Attorney at $417 per hour for 4 hours) + (Sr. Operations Manager
at $366 per hour for 20 hours) + (Systems Analyst at $263 per hour
for 16 hours) + ($308.50 blended rate for Sr. Systems Analyst and
Sr. Programmer for 6 hours)] = 246 initial burden hours per
competing consolidator and $80,507.
\728\ The Commission estimates that each competing consolidator
would incur an initial external cost of $800 for an external website
developer to create the website.
\729\ The Commission estimates the monetized initial aggregate
burden for this requirement to be $966,804. The Commission derived
this estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [(Sr. Programmer at $332 per hour
for 160 hours) + (Sr. Database Administrator at $342 per hour for 20
hours) + (Sr. Business Analyst at $275 per hour for 20 hours) +
(Attorney at $417 per hour for 4 hours) + (Sr. Operations Manager at
$366 per hour for 20 hours) + (Systems Analyst at $263 per hour for
16 hours) + ($308.50 blended rate for Sr. Systems Analyst and Sr.
Programmer for 6 hours)] x [(12 competing consolidators)] = 2,952
initial aggregate burden hours across the competing consolidators
and $966,804.
\730\ $9,600 = ($800 for an external website developer to create
the website) x (12 competing consolidators).
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(b) Ongoing Burden and Costs
The Commission estimates that each competing consolidator would
incur an average burden of 11 hours to prepare and make publicly
available a monthly report in the format required by proposed Rules
614(d)(5) and (d)(6) (for a total cost of $3,768.50), or a burden of
132 hours per year (for a total cost of $45,222).\731\ Once a report is
posted on an internet website, the Commission does not estimate that
there would be an additional burden to allow the report to remain
posted for the period of time specified in the rules. The total burden
per year for all competing consolidators to comply with the monthly
reporting requirement in proposed Rules 614(d)(5) and (d)(6) is
estimated to be 1,584 hours (for a total cost of $542,664).\732\
---------------------------------------------------------------------------
\731\ This figure is based on the estimated ongoing paperwork
burden for Rule 606(a), which requires each broker or dealer to make
publicly available on a website a report on a quarterly basis. In
the Paperwork Reduction Act discussion for Rule 606(a), the
Commission established that the average annual burden for a broker-
dealer to comply with Rules 606(a)(1)(i)-(iii) would be 10 hours.
See supra note 727, at 58388. For purposes of this proposal, the
Commission is converting the 10 hour estimate for a quarterly report
to an estimate for a monthly report. Additionally, the Commission is
adding the burden of updating the website. The Commission estimates
the monetized annual burden for this requirement to be $3,768.50.
The Commission derived this estimate based on per hour figures from
SIFMA's Management & Professional Earnings in the Securities
Industry 2013, modified by Commission staff to account for an 1,800-
hour work-year and inflation, and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead: [(Sr. Business
Analyst at $275 per hour for 5 hours) + (Attorney at $417 per hour
for 5 hours) + ($308.50 blended rate for Sr. Systems Analyst and Sr.
Programmer for 1 hour)] x [(12 months)] = 132 initial burden hours
per competing consolidator and $45,222.
\732\ The Commission estimates the monetized annual aggregate
burden for this requirement to be $542,664. The Commission derived
this estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [(Sr. Business Analyst at $275 per
hour for 5 hours) + (Attorney at $417 per hour for 5 hours) +
($308.50 blended rate for Sr. Systems Analyst and Sr. Programmer for
1 hour)] x [(12 competing consolidators)] x [(12 months)] = 1,584
aggregate burden hours across the competing consolidators and
$542,664.
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5. Amendment to the Effective National Market System Plan(s) for NMS
Stocks
As discussed above, the proposed rule would require an amendment to
the effective national market system plan(s) for NMS stocks from the 16
national securities exchanges and one national securities association
respondents who are participants in the effective national market
system plan(s). The Commission preliminarily estimates that it would
take the participants to the effective
[[Page 16807]]
national market system plan(s) approximately 420 hours to prepare the
amendment. This preliminary estimate includes 210 hours for a
respondent to comply with the timestamps required by the proposed rule,
including a review and any applicable change of the respondent's
technical systems and rules. Each SRO already employs some form of
timestamping, and the Commission does not necessarily expect that the
burden to comply with the timestamp requirement would be particularly
burdensome.\733\ The preliminary estimate also includes 105 hours for
the participants to compose the form of annual report on competing
consolidator performance. Finally, the preliminary estimate includes 20
hours the participants to compile and confirm the primary listing
exchange for each NMS stock. The initial burden hours for all
respondents would be 420 hours x 17 (for a total cost of
$2,977,380).\734\
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\733\ Currently, under the Equity Data Plans, the SROs attach
timestamps to quotation information and transaction information
provided to the exclusive SIPs. See, e.g., Nasdaq UTP Plan, supra
note 13, at Section VIII; CQ Plan, supra note 13, at Section VI; CTA
Plan, supra note 13, at Section VI.
\734\ The Commission estimates the monetized burden for this
requirement to be $130,860. The Commission derived this estimate
based on per hour figures from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified by Commission
staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead: [(Attorney at $417 for (420 x 17) hours)].
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6. Collection and Dissemination of Information by National Securities
Exchanges and National Securities Associations
As discussed above, the proposed amendment to Rule 603(b) would
require every national securities exchange on which an NMS stock is
traded and national securities association to make available to all
competing consolidators and self-aggregators all information with
respect to quotations for and transactions in NMS stocks, including all
data necessary to generate consolidated market data, in the same manner
and using the same methods, including all methods of access and using
the same formats, as such exchange or association makes available any
information with respect to quotations for and transactions in NMS
stocks to any person. Accordingly, the SROs would be required to
collect the information necessary to generate proposed consolidated
market data, which would be required to be made available under
proposed Rule 603(b). The respondents to this collection of information
are the 16 national securities exchanges and the one national
securities association who are participants in the effective national
market system plan(s). The new data elements of proposed consolidated
market data that the national securities exchanges and national
securities associations must make available include auction
information, depth of book data, round lot data, regulatory data
(including LULD price bands), and administrative data. The Commission
understands that the national securities exchanges and national
securities associations currently collect and/or calculate all data
necessary to generate proposed consolidated market data.\735\
Therefore, the Commission believes that the proposed amendments to
603(b) would impose minimal initial and ongoing burdens on these
respondents, including any changes to their systems, because they
already collect and provide the data necessary to generate proposed
consolidated market data, including regulatory data, to the exclusive
SIPs and to subscribers of their proprietary data feeds.
---------------------------------------------------------------------------
\735\ For example, the primary listing exchanges currently
calculate LULD price bands and related information to generate
synthetic LULD price bands. See Nasdaq, Equity Trader Alert #2016-
79: NASDAQ Announces Improved Protections for Equity Markets Coming
Out of Halts (``Leaky Bands'') (Apr. 12, 2016), available at https://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2016-79; NYSE, Trader
Update: NYSE and NYSE MKT: Enhanced Limit Up Limit Down Procedures
(Aug. 1, 2016), available at https://www.nyse.com/trader-update/history#110000029205; Securities Exchange Act Release No. 34-78435
(July 28, 2016), 81 FR 51239 (Aug. 3, 2016) (SR-FINRA-2016-028).
---------------------------------------------------------------------------
(a) Initial Burden and Costs
The Commission preliminarily estimates, in order to collect the
information necessary to generate consolidated market data as required
by proposed Rule 603(b), that a national securities exchange on which
an NMS stock is traded or national securities association will require
an average of 220 \736\ initial burden hours of legal, compliance,
information technology, and business operations personnel time to
prepare and implement such a system (for a total cost per exchange of
$70,865).\737\
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\736\ The Commission based its estimate on the burden hour
estimate provided in connection with the adoption of Regulation SHO
because the requirements are similar to what a national securities
exchange or national securities association would need to do to
comply with proposed Rule 603(b). See Commission, Supporting
Statement for the Paperwork Reduction Act Information Collection
Submission for Rule 201 and Rule 200(g) of Regulation SHO (Sept. 5,
2019).
\737\ The Commission estimates the monetized initial burden for
this requirement to be $70,865. The Commission derived this estimate
based on per hour figures from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified by Commission
staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead: [(Compliance Manager at $310 for 105 hours) +
(Attorney at $417 for 70 hours) + (Sr. Systems Analyst at $285 for
20 hours) + (Operations Specialist at $137 for 25 hours)] = 220
initial burden hours and $70,865.
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(b) Ongoing Burden and Costs
The Commission estimates that each national securities exchange on
which an NMS stock is traded and national securities association would
incur an annual average burden on an ongoing basis of 396 hours to
collect the information necessary to generate proposed consolidated
market data required by proposed Rule 603(b) (for a total cost per
exchange of $128,064).\738\
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\738\ The Commission estimates the monetized ongoing, annual
burden for this requirement to be $128,064. The Commission derived
this estimate based on per hour figures from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [(Compliance Manager at $310 for 192
hours) + (Attorney at $417 for 48 hours) + (Sr. Systems Analyst at
$285 for 96 hours)] = 336 initial burden hours and $128,064.
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E. Collection of Information Is Mandatory
The collection of information discussed above would be a mandatory
collection of information.
F. Confidentiality
1. Registration Requirements and Form CC
As discussed above, under proposed Rule 614(b)(2), the Commission
would make public via posting on the Commission's website each: (i)
Effective initial Form CC, as amended; (ii) order of ineffectiveness of
a Form CC; (iii) filed Form CC Amendment; and (iv) notice of cessation.
2. Competing Consolidator Duties and Data Collection and Maintenance
The collection of information regarding competing consolidator
duties and data collection and maintenance relates to the proposed
consolidated market data that competing consolidators will collect,
calculate, and provide to subscribers.
3. Recordkeeping
The collection of information relating to recordkeeping would be
available to the Commission and its staff, and to other regulators.
4. Reports and Reviews
The collection of information regarding reports and reviews relates
to information that would be published on competing consolidator
websites.
[[Page 16808]]
5. Amendment to the Effective National Market System Plan(s) for NMS
Stocks
Amendments to the effective national market system plan(s) for NMS
stocks would be required to be filed with the Commission pursuant to
Rule 608. Once filed, the Commission would publish the amendments for
public comment. Finally, the annual report of competing consolidator
performance would be submitted to the Commission.
6. Collection and Dissemination of Information by National Securities
Exchanges and National Securities Associations
As discussed above, the proposed amendment to Rule 603(b) would
require national securities exchanges and national securities
associations to collect and provide information to the competing
consolidators and self-aggregators, not to the Commission. Therefore,
no assurances of confidentiality are necessary because the information
will be made available to the public for a fee from the competing
consolidators.
G. Revisions to Current Regulation SCI Burden Estimates
As described above, the Commission is proposing to expand the
definition of ``SCI entities'' under Regulation SCI to include
``competing consolidators,'' which would be defined to have the same
meaning as set forth in the proposed amendments to Rule 600(b)(16) of
Regulation NMS.\739\ Thus, under the proposal, competing consolidators
would be subject to the requirements of Regulation SCI.
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\739\ See proposed amendment to Rule 1000 of Regulation SCI.
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The rules under Regulation SCI impose ``collection of information''
requirements within the meaning of the PRA.\740\ Rule 1001(a) of
Regulation SCI requires each SCI entity to establish, maintain, and
enforce written policies and procedures for systems capacity,
integrity, resiliency, availability, and security. Rule 1001(b)
requires each SCI entity to establish, maintain, and enforce written
policies and procedures to ensure that its SCI systems operate in a
manner that complies with the Exchange Act, the rules and regulations
thereunder, and the SCI entity's rules and governing documents, as
applicable. Rule 1001(c) requires each SCI entity to establish,
maintain, and enforce written policies and procedures for the
identification, designation, and documentation of responsible SCI
personnel and escalation procedures. Rule 1002(a) requires each SCI
entity to begin to take appropriate corrective action upon any
responsible SCI personnel having a reasonable basis to conclude that an
SCI event has occurred. Rule 1002(b) requires each SCI entity to notify
the Commission of certain SCI events. Rule 1002(c) requires each SCI
entity, with certain exceptions, to disseminate information about SCI
events to affected members or participants, and disseminate information
about major SCI events to all members or participants. Rule 1003(a)
requires each SCI entity to notify the Commission of material systems
changes quarterly. Rule 1003(b) requires each SCI entity to conduct
annual SCI reviews. Rule 1004 requires each SCI entity to designate
certain members or participants for participation in functional and
performance testing of the SCI entity's business continuity and
disaster recovery plans, and to coordinate such testing with other SCI
entities. Rules 1005 and 1007 set forth recordkeeping requirements for
SCI entities. Rule 1006 requires, with certain exceptions, that each
SCI entity electronically file required notifications, reviews,
descriptions, analysis, or reports to the Commission on Form SCI.\741\
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\740\ For a complete analysis of Regulation SCI under the PRA,
see SCI Adopting Release, supra note 28, at 18141; and Proposed
Collection; Comment Request; Extension: Regulation SCI, Form SCI;
SEC File No. 270-653, OMB Control No. 3235-0703, 83 FR 34179 (``2018
PRA Extension'').
\741\ For further details regarding the requirements of
Regulation SCI, see Regulation SCI Adopting Release, supra note 28.
See also ``Responses to Frequently Asked Questions Concerning
Regulation SCI,'' September 2, 2015 (updated August 21, 2019),
available at: https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml.
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In 2018, there were an estimated 42 entities that met the
definition of SCI entity and were subject to the collection of
information requirements of Regulation SCI (``respondents'').\742\ At
that time, an estimate of approximately 2 entities would become SCI
entities each year, one of which would be an SRO. Accordingly, under
these estimates, over the following three years, there would be an
average of approximately 44 SCI entities each year.\743\
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\742\ See 2018 PRA Extension, supra note 740, at 34180.
\743\ Id.
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As discussed above, the Commission preliminarily estimates that,
under the current proposal, there could be 12 competing consolidators
that would be subject to Regulation SCI as SCI entities.\744\ As
discussed below, some of these entities may already be SCI entities and
subject to the requirements of Regulation SCI. While the Commission
estimates that the number of respondents would increase as a result of
this proposal, the Commission preliminarily believes that its prior
paperwork burden estimates per entity under Regulation SCI generally
would be applicable to these new competing consolidators because they
would be subject to the same requirements and burdens as other SCI
entities.\745\ At the same time, the Commission preliminarily believes
that burden estimates also should take into account the extent to which
the entities that may register to become competing consolidators
already comply with the requirements of Regulation SCI.
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\744\ See supra Section V.C.
\745\ See 2018 PRA Extension, supra note 740. As discussed
below, the Commission believes that 6 of the 12 entities estimated
to register as competing consolidators are currently SCI entities.
Thus, the Commission preliminarily estimates that, if the proposal
were adopted, there would be an average of approximately 50 SCI
entities each year.
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In particular, the Commission preliminarily believes that 2 of the
estimated 12 competing consolidators may be the existing exclusive
SIPs, which are currently subject to Regulation SCI as plan processors.
Because these entities are responsible for collecting, consolidating,
and disseminating proposed consolidated market data to market
participants and thus would be operating a substantially similar
business and performing a similar function in their role as competing
consolidators, the Commission preliminarily believes that the current
ongoing burden estimates for existing SCI entities would be applicable
and there would be no material change in the estimated paperwork
burdens for these entities under Regulation SCI.\746\
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\746\ Id. The burden estimates for SCI entity respondents
included initial burdens for new SCI entities and ongoing burdens
for all SCI entities. For the reasons discussed herein, the
Commission preliminarily believes that the initial paperwork burdens
for new SCI entities would not be applicable to these entities.
---------------------------------------------------------------------------
As stated above, the Commission also preliminarily believes that 4
of the entities that may register to become competing consolidators may
be either: (i) An SRO currently subject to Regulation SCI; or (ii) an
entity affiliated with an SCI SRO, formerly subject to Regulation SCI.
The burden estimates for SCI entity respondents include both initial
burdens for new SCI entities and ongoing burdens for all SCI
entities.\747\ Because these SRO entities that would become competing
consolidators are current SCI entities and are already required to
implement the requirements of Regulation SCI with regard to SCI systems
that they operate in their role as
[[Page 16809]]
SCI SROs, the Commission preliminarily believes that these entities
would not have initial burdens equivalent to those estimated for new
SCI entities. At the same time, as discussed above, the Commission
preliminarily believes that these SROs may be a national securities
association and/or equities national securities exchanges that do not
currently operate an exclusive SIP. Because these entities would be
entering an entirely new business and performing a new function with
new SCI systems, unlike the current exclusive SIPs who may register to
become competing consolidators discussed above, the Commission
preliminarily believes that these SRO entities would have some initial
burden that would be a percentage of that which entirely new SCI
entities have. In particular, the Commission preliminarily estimates
that the initial burdens for existing SCI SROs who register as
competing consolidators would be 50 percent of the estimated initial
burdens for entirely new SCI entities. For example, the Commission
believes that such SCI SROs would need to develop and draft the
policies and procedures required by Rule 1001(a) for new SCI systems
utilized in their role as competing consolidators, but unlike
completely new SCI entities, SCI SROs would already have existing Rule
1001(a) policies and procedures in place for other types of SCI systems
that they could utilize as a model and modify as needed for new SCI
systems.\748\ The Commission also believes that the estimated ongoing
paperwork burden estimates for all SCI entities would be applicable to
these entities as well.\749\
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\747\ Id.
\748\ As an example, the estimate of an initial recordkeeping
burden was 694 hours per new respondent to comply with the policies
and procedures requirement of Rule 1001(a). Id. at 34180. The
Commission preliminarily estimates that, for an SCI SRO who
registers as a competing consolidator, the initial burden for Rule
1001(a) would be 50 percent of this estimated amount, or 347 hours.
\749\ The ongoing paperwork burden estimates in the PRA
Extension do not distinguish between different categories of SCI
entities, but rather provides an average for all SCI entities.
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The Commission preliminarily believes that the remaining 6
estimated competing consolidators may be entities that are not
currently subject to Regulation SCI. As discussed above, the Commission
believes that these 6 entities may be market data aggregation firms,
broker-dealers that currently aggregate market data for internal uses,
and entities that would be entering the market data aggregation
business for the first time.\750\ Accordingly, the Commission
preliminarily believes that these entities would have the same
estimated initial paperwork burdens as those estimated for new SCI
entities and the same ongoing paperwork burdens as all other SCI
entities.\751\
---------------------------------------------------------------------------
\750\ See supra Section V.D.2.
\751\ See 2018 PRA Extension, supra note 740.
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H. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
156. Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility;
157. Evaluate the accuracy of our estimates of the burden of the
proposed collection of information;
158. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
159. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and
160. Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File Number S7-03-20.
Requests for materials submitted to OMB by the Commission with regard
to this collection of information should be in writing, with reference
to File Number S7-03-20 and be submitted to the Securities and Exchange
Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC
20549-2736. As OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication, a
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication.
VI. Economic Analysis
A. Introduction and Market Failures
1. Introduction
Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action would promote efficiency, competition, and capital
formation.\752\ In addition, Section 23(a)(2) of the Exchange Act
requires the Commission, when making rules under the Exchange Act, to
consider the impact such rules would have on competition.\753\ Exchange
Act Section 23(a)(2) prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------
\752\ 15 U.S.C. 78c(f).
\753\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
Wherever possible, the Commission has quantified the likely
economic effects of the proposed amendments. The Commission is
providing both a qualitative assessment and quantified estimates of the
potential economic effects of the proposed amendments where feasible.
The Commission has incorporated data and other information provided by
commenters to assist it in the analysis of the economic effects of the
proposed amendments. However, as explained in more detail below,
because the Commission does not have, and in certain cases does not
believe it can reasonably obtain data that may inform the Commission on
certain economic effects, the Commission is unable to quantify certain
economic effects. Further, even in cases where the Commission has some
data, it is not practicable due to the number and type of assumptions
necessary to quantify certain economic effects, which render any such
quantification unreliable. Our inability to quantify certain costs,
benefits, and effects does not imply that such costs, benefits, or
effects are less significant. The Commission requests that commenters
provide relevant data and information to assist the Commission in
analyzing the economic consequences of the proposed amendments.
In general, the Commission preliminarily believes that the proposed
amendments would result in benefits by enhancing the consolidated
market data content, reducing the latency of consolidated market data,
and improving the dissemination of
[[Page 16810]]
consolidated market data. This would reduce information asymmetries
that exist between market participants who subscribe to proprietary DOB
and other proprietary products and market participants who only
subscribe to SIP data, and could allow some market participants who
subscribe to the more expensive proprietary DOB products to replace
them with potentially cheaper consolidated market data feeds.
Improvements to the content and latency of consolidated market data
from the proposed amendments could also help market participants that
currently rely on SIP data to make more informed trading decisions,
which would facilitate their ability to trade competitively and improve
their execution quality, and would facilitate best execution.
The Commission preliminarily believes there are three main benefits
from the expanded content of consolidated market data, which as noted
above includes proposed ``core data.'' First, the expanded content of
consolidated market data could allow market participants that currently
only subscribe to SIP data to get additional content from expanded
consolidated market data and to experience increased gains from trade
by allowing them to take advantage of trading opportunities they may
not have been aware of due to the lack of information in existing SIP
data.\754\ Second, the expanded content of consolidated market data
could also allow these market participants to improve their order
routing and order execution capabilities, potentially lowering investor
transaction costs. Finally, the expanded consolidated market data
content and associated changes in how the NBBO and protected quotes are
calculated could result in a narrower NBBO and wider protected quote in
some stocks. A narrower NBBO and changes in protected quotes could
affect price improvement that trading venues, including ATSs,
exchanges, and internalizers, could offer.
---------------------------------------------------------------------------
\754\ Here and throughout, the phrase ``gains from trade'' is
meant to refer to a situation in which two market participants would
each be better off if they exchanged their respective property. It
captures the idea of a potential welfare benefit that could be
realized if trade was allowed and possible. Generally in this
proposal the relevant property will be securities and cash.
---------------------------------------------------------------------------
The Commission preliminarily believes that there are costs to
expanding the content of consolidated market data, including costs to
new competing consolidators related to upgrading existing
infrastructure in order to handle the dissemination of the increased
message traffic; upgrading software and trading systems that consume
consolidated market data; costs to market participants receiving
consolidated market data from technological investments required to
handle increased content and message traffic; as well as other costs.
Expanding consolidated market data would also result in transfers among
various market participants, including transfers from the current
beneficiaries of asymmetric information associated with the uneven
distribution of market data to market participants who currently do not
have access to the additional information contained in proprietary DOB
products and other proprietary products. There could also be costs to
SROs associated with the dissemination of consolidated market data.
With respect to the introduction of the decentralized consolidation
model, the Commission has several reasons to believe that it is likely
that a sufficient number of firms would be willing to enter the space
of competing consolidators so that the market would be competitive.
Under this assumption, the potential economic benefits of the proposed
decentralized consolidation model would include a reduction in the
latency differential that exists between SIP data and proprietary data
feeds (as measured at the location of market participants using the
data) and potential improvements in innovation and efficiency in the
consolidated market data delivery space. Moreover, the fees for
proposed consolidated market data could be lower than fees that market
participants pay for similar depth of book data today because today
market participants would need to subscribe to both the exclusive SIPs
and proprietary data feeds to receive the same content that would be
included in proposed consolidated market data. However, the Commission
recognizes that there is uncertainty in the fees for proposed
consolidated market data because they would depend on the structure of
fees ultimately proposed for data content by an effective national
market system plan(s) and on the ultimate fee structure of competing
consolidators.\755\ The Commission also recognizes uncertainty in the
fees that subscribers choosing to receive a subset of consolidated
market data would pay under the proposed rule and that these
subscribers could pay higher or lower fees than they do today for
equivalent data.
---------------------------------------------------------------------------
\755\ See infra Section VI.C.2(b).
---------------------------------------------------------------------------
At the same time, the introduction of the decentralized
consolidation model would impose direct costs on SROs, the existing
exclusive SIPs, and potential competing consolidators. It would also
impose indirect costs on the existing exclusive SIPs and market
participants. The direct costs for potential competing consolidators
(such as SROs, exclusive SIPs, and current market data aggregators)
would include registration and compliance costs and implementation and
incremental infrastructure costs. The Commission, however,
preliminarily believes that many of the potential competing
consolidators have currently already invested in this infrastructure
for the existing business services that they provide (e.g., proprietary
data aggregation services). The indirect costs to the existing
exclusive SIPs would be a potential loss in revenue to competing
consolidators from no longer being the exclusive distributors of
consolidated market data. The indirect costs for market participants
would include implementation costs and potential effects on prices that
market participants would pay for the proposed consolidated market
data. However, new fees for the data content of consolidated market
data would need to be proposed by the effective NMS plan(s) for NMS
stocks and filed with the Commission.
The Commission preliminarily believes that there are a number of
economic effects that are only possible as a result of expanding
consolidated market data and the introduction of the decentralized
consolidation model. These changes would lead to the benefits of less
expensive alternatives to proprietary DOB products for market
participants; potential new entrants into the broker-dealer, market
making, and other latency sensitive trading businesses; expansion of
business opportunities for market data aggregators; improved regulatory
oversight from the Consolidated Audit Trail; and enhancements to the
quality of service data vendors are able to provide. Further, as noted
above, the Commission preliminarily believes that the proposal would
facilitate best execution and reduce information asymmetries. These
changes could also result in a number of costs including costs to
market participants in the form of lower revenues for SROs; higher
costs for the implementation of the Consolidated Audit Trail;
potentially higher costs for certain market data vendors; as well as
other costs. Some of these benefits and costs would result from
transfers among various market participants.
2. Market Failures
The Commission is proposing to amend Rules 600 and 603 and to adopt
new Rule 614 of Regulation NMS under
[[Page 16811]]
the Exchange Act to increase the availability and improve the
dissemination of information regarding quotations for and transactions
in NMS stocks to market participants. First, the Commission proposes to
define terms ``consolidated market data,'' ``core data,'' ``regulatory
data,'' and ``administrative data,'' and to enhance the content of core
data to include certain odd-lot quote information, certain depth of
book data, and information on orders participating in auctions. Second,
the Commission proposes to introduce a decentralized consolidation
model whereby competing consolidators and self-aggregators would assume
responsibility for the collection, consolidation, and dissemination
functions currently performed by the exclusive SIPs.\756\
---------------------------------------------------------------------------
\756\ See supra Sections III, IV.
---------------------------------------------------------------------------
As discussed above,\757\ currently, some market participants have
stated their view that they are unable to rely solely on SIP data to
trade competitively in today's markets. One reason is that SIP data
does not currently include some important data elements such as odd-lot
quotations (except, as explained above,\758\ to the extent that odd-
lots quotations are aggregated into round lots pursuant to exchange
rules), depth of book data, and information about orders participating
in auctions.\759\ Exchanges directly sell these additional data
elements to market participants and market data aggregation firms as
part of proprietary DOB data products at significant premiums to SIP
products.\760\ Another reason some market participants have raised
concerns about SIP data is that there is a substantial latency
differential between market data provided via the exclusive SIPs and
proprietary data products delivered by the exchanges directly to market
participants or to market data aggregators as part of proprietary data
feeds.\761\ The latency and content disparity between SIP data feeds
and proprietary DOB data products has the effect of increasing the
market participants' demand for proprietary products to the extent
market participants view acquiring such products as a competitive
necessity.
---------------------------------------------------------------------------
\757\ Id.
\758\ See supra Section III.C.1(a).
\759\ As explained above, only limited auction-related
information is currently included in SIP data. See supra Section
III.C.3(a).
\760\ See infra Section VI.B.2(a).
\761\ See infra Section VI.B.2(b).
---------------------------------------------------------------------------
The Commission understands that there is an inherent conflict of
interest in that the exchanges, as voting members of the Equity Data
Plan operating committees, may not be incentivized to improve the
content or latency of SIP data.\762\ Many of the exchanges have
actively pursued commercial interests that do not necessarily further
the regulatory objective to ``preserve the integrity and affordability
of the consolidated data stream,'' \763\ which is necessary to ensure
that there is a ``comprehensive, accurate, and reliable source of
information for the prices and volume of any NMS stock at any time
during the trading day.'' \764\ One example of this divergence of
interest has been the development by certain exchanges of proprietary
data products with reduced latency and expanded content (i.e.,
proprietary DOB products), without the exchanges, in their role as
participants to the Equity Data Plans, similarly enhancing the data
products offered by the Equity Data Plans.\765\ These proprietary DOB
products have evolved to be considered competitive necessities by many
market participants and are offered at significant premiums to
exclusive SIP products.\766\ Another example of the divergence between
commercial interests and regulatory goals has been the development by
certain exchanges of limited TOB data products, which are offered at a
discount compared to the SIP data and marketed to a more price-
sensitive segment of the market, without corresponding development by
the exclusive SIPs of a less expensive SIP product for the price-
sensitive segment of the market.\767\ The exchanges have continued to
develop and enhance their proprietary market data businesses--which
generate revenue that, unlike SIP data revenues, do not have to be
shared with the other SROs--while remaining fully responsible for the
governance and operation of the Equity Data Plans, including content,
infrastructure, and pricing, as well as data consolidation and
dissemination.\768\ At the same time, the operation of the Equity Data
Plans has not kept pace with the efforts of the exchanges to expand the
content of and to employ technology to reduce the latency and increase
the throughput of certain proprietary data products.
---------------------------------------------------------------------------
\762\ See supra Section IV.A; supra note 267 (describing an
exchange-led initiative to enhance the SIPs).
\763\ See Regulation NMS Adopting Release, supra note 10, at
37503.
\764\ See Equity Market Structure Concept Release, supra note
11, at 3600.
\765\ See Proposed Governance Order, supra note 8, at Section
II.B.1.
\766\ See id.
\767\ See id.; supra note 25.
\768\ See Proposed Governance Order, supra note 8, at Section
II.B.1.
---------------------------------------------------------------------------
The Commission preliminarily believes that there are two additional
factors related to the Equity Data Plan processors that may impede
improvements to the dissemination of SIP data. First, pursuant to
Regulation NMS, each exclusive SIP has exclusive rights to collect
trade and quotation data related to NMS stocks from multiple SROs and
then aggregate and disseminate market data to market participants.\769\
This structure may further impede improvements in the dissemination of
SIP data \770\ because Equity Data Plan participants that govern
exclusive SIPs do not have incentives to innovate due to the lack of
competition in dissemination of SIP data.
---------------------------------------------------------------------------
\769\ See supra note 21 and accompanying text.
\770\ See infra Section VI.B.2(b).
---------------------------------------------------------------------------
Second, the exclusive SIPs are either SROs themselves or affiliates
of SROs.\771\ This gives them a dual role in that they serve as both
existing plan processors and as entities selling directly their own
proprietary market data products that can reach market participants
faster than SIP data, or as affiliates of entities that do so. As
discussed above, this may create an additional conflict of interest
that could provide incentives making the Equity Data Plan participants
that oversee the Equity Data Plans reluctant to improve the content and
latency of the SIP data, because a divergence in the usefulness of SIP
data provided by the exclusive SIPs as compared to the proprietary data
feeds increases the value of the proprietary market data products.
---------------------------------------------------------------------------
\771\ See supra note 42.
---------------------------------------------------------------------------
B. Baseline
The Commission has assessed the likely economic effects of the
proposed amendments, including benefits, costs, and effects on
efficiency, competition, and capital formation, against a baseline that
consists of the existing regulatory process for collecting,
consolidating, and disseminating market data, and the structure of the
markets for SIP data products and for connectivity and trading
services.
1. Current Regulatory Process for Equity Data Plans and SIP Data
As discussed above,\772\ the current regulatory framework for SIP
data relies upon a centralized consolidation model, whereby the SROs
provide certain quotation and transaction information for each NMS
stock to a single exclusive SIP, which then consolidates this data and
makes it available to market participants.\773\ This SIP data includes
what historically has commonly been
[[Page 16812]]
referred to as core data, as well as certain regulatory data related to
Commission and SRO rules and NMS plan requirements.\774\
---------------------------------------------------------------------------
\772\ See supra Section II.A.
\773\ Id.
\774\ Id.
---------------------------------------------------------------------------
As discussed in more detail below,\775\ SIP data currently includes
transaction information for both round lot and odd-lot sized
transactions as well as quotation information for round lot top of book
quotes for each SRO. Additionally, several exchanges, pursuant to their
own rules, aggregate odd-lot orders into round lots and report such
aggregated odd-lot orders as quotation information to the exclusive
SIPs.\776\ Thus, SIP data lacks information on odd-lot quotations at
prices better than the best bid and offer and on depth of book
quotations (i.e., limit orders resting at exchanges at prices outside
of the bid and offer). Additionally, only limited auction-related
information is included in SIP data.\777\
---------------------------------------------------------------------------
\775\ See infra Section VI.B.2(a); supra Section III.C.1.
\776\ See supra Section III.C.1(a).
\777\ See supra Section III.C.3.
---------------------------------------------------------------------------
Currently, the operating committees of the Equity Data Plans, which
are governed exclusively by the SROs,\778\ select the exclusive SIPs to
consolidate and disseminate market data to market participants. The
selection process for the exclusive SIPs is organized through a bidding
process, and once selected, an exclusive SIP has exclusive rights to
consolidate and disseminate market data for a given Equity Data
Plan.\779\ Currently, SIAC (a NYSE affiliate) is the exclusive SIP for
the CTA and CQ Plans, and Nasdaq is the exclusive SIP for the UTP Plan.
---------------------------------------------------------------------------
\778\ Under the Proposed Governance Order, the operating
committee of the New Consolidated Data Plan would include non-SRO
members. See Proposed Governance Order, supra note 8.
\779\ The Nasdaq UTP Plan contains the description of its
approach to the selection and evaluation of the processor. See
Nasdaq UTP Plan, supra note 13, at 10. The CTA/CQ Plan does not
contain a similar provision. See CTA Plan, supra note 13; CQ Plan,
supra note 13. Historically, exchanges or exchange affiliates had
always been selected to be plan processors.
---------------------------------------------------------------------------
As explained above, each exclusive SIP is physically located in a
different data center.\780\ The exchanges' primary data centers are
also located in different locations. Each exchange and FINRA must
transmit its quotation and transaction information from its own data
center to the appropriate exclusive SIP's data center for
consolidation, at which point SIP data is then further transmitted to
market data end-users, which are often located in other data centers.
The exclusive SIPs do not compete with each other in the collection,
consolidation, or dissemination of SIP data. As discussed in more
detail below,\781\ the dispersed physical locations of exclusive SIPs
and SROs contribute to increased latency in delivering SIP data to
market participants.
---------------------------------------------------------------------------
\780\ See supra Section II.A; supra note 43.
\781\ See infra Section VI.B.2(a); supra Section IV.A.
---------------------------------------------------------------------------
2. Current Process for Collecting, Consolidating, and Disseminating
Market Data
As discussed above,\782\ in addition to the provision of SIP data
pursuant to the Equity Data Plans, the national securities exchanges
separately sell their individual proprietary market data products
directly to market participants via proprietary data feeds. Proprietary
data feeds may include SIP data elements and a variety of additional
data elements and can vary in content from proprietary top of book
products to proprietary depth of book products.\783\ In addition, in
connection with proprietary data feed products, the exchanges offer
various connectivity services (e.g., co-location at primary data
centers, fiber optic connectivity, wireless connectivity, and point-of-
presence connectivity at third-party data centers), which may result in
higher speed transmissions.\784\ Typically, proprietary data is
transmitted directly from each exchange to the data center of the
subscriber, where the subscriber's broker-dealer or vendor (or the
subscriber itself) privately consolidates such data with the
proprietary data of the other exchanges. This section describes the
current content of SIP data and proprietary data feeds, current process
of data dissemination, and current process for costs of generating SIP
data and proprietary data feeds.
---------------------------------------------------------------------------
\782\ See supra Section II.A.
\783\ See supra Section III.C.2.
\784\ See supra note 51 and accompanying text; supra Section
IV.A.
---------------------------------------------------------------------------
(a) Current Content of SIP Data and Proprietary Data Feeds
As discussed above,\785\ today SIP data does not include some of
the content that certain market participants rely on when handling
customer orders and trading. The Commission preliminarily believes that
while a large portion of retail investors rely solely on SIP data for
trading decisions,\786\ a certain portion of market participants do not
rely solely on SIP data to trade competitively in today's markets and
instead purchase proprietary data from SROs to supplement or even
replace SIP data.\787\ In particular, the Commission understands that
approximately 50 to 100 firms purchase all of the DOB proprietary feeds
from the exchanges and do not rely on the SIP data for their
trading.\788\ Conversely, the number of users of the SIP data is much
larger (in the millions),\789\ suggesting that many users rely on the
exclusive SIPs alone. This creates significant information asymmetries
between market participants who rely solely on SIP data and market
participants who also rely on proprietary data feeds.
---------------------------------------------------------------------------
\785\ See supra Section III.C.
\786\ In response to a question about the need for Nasdaq's
other market data products since the exclusive SIPs consolidate all
market data, Nasdaq has stated: ``[t]here are a minority of market
participants who want data that go `deeper' than SIP data, such as
pending buy and sell interest at different price levels. For these
customers of market data, Nasdaq and other firms offer proprietary
products that include so-called `depth of book' and related auction
data from our exchanges.'' See Nasdaq, Revenues Trend Down for U.S.
Stock Market Data Backbone (Mar. 14, 2018), available at https://www.nasdaq.com/articles/revenues-trend-down-us-stock-market-data-backbone-2018-03-14.
\787\ The Commission preliminarily believes that when market
participants purchase proprietary data feeds to replace SIP data,
they also almost always purchase SIP data as a back-up system to
proprietary data. See also supra note 101.
\788\ See supra note 140.
\789\ As of the fourth quarter of 2018, there were approximately
2-3 million non-professional and approximately 0.3 million
professional use cases across the UTP and CTA/CQ SIPs. Additionally,
there were approximately 300 non-display vendor use cases at each of
the exclusive SIPs. The Commission understands that there is an
overlap in subscribers across the exclusive SIPs. See, e.g., CTA
Plan, Q3 2019 CTA Tape A & B Quarterly Population Metrics, available
at https://www.ctaplan.com/publicdocs/CTAPLAN_Population_Metrics_3Q2019.pdf; Nasdaq UTP Plan, Q3 2019 UTP
Quarterly Population Metrics, available at http://www.utpplan.com/DOC/UTP_2019_Q3_Stats_with_Processor_Stats.pdf.
---------------------------------------------------------------------------
As described in Section II.A above, SIP data consists of certain
quotation \790\ and transaction data \791\ that the SROs are required
to provide to the exclusive SIPs for consolidation and dissemination to
the public on the consolidated tapes. Specifically, the SIP data
includes: (1) An NBBO; \792\ (2) the best bids and best offers from
each SRO; \793\ and (3) information on trades such as prices and sizes.
The SIP data also includes certain regulatory data,
[[Page 16813]]
such as information required by the LULD Plan,\794\ information
relating to regulatory halts and MWCBs,\795\ information regarding
short sale circuit breakers,\796\ and other data, such as data relating
to retail liquidity programs, market and settlement conditions, the
financial condition of the issuer, OTCBB data, last sale prices for
corporate bonds, and information about indices.\797\
---------------------------------------------------------------------------
\790\ See Rule 602 of Regulation NMS, 17 CFR 242.602.
\791\ See Rule 601 of Regulation NMS, 17 CFR 242.601.
\792\ The national best bid and offer are constructed from the
best bid and offer prices across all exchanges in which the quoted
size is at least one round lot. See supra Section III.C.1.
\793\ The best bids and offers on an exchange are determined by
the best prices in which the quoted size is at least one round lot.
Some exchanges aggregate odd-lot orders at better prices into round
lots and report such aggregated orders as their best bid or offer at
the least aggressive price of the aggregated orders. Typically, the
best bids and offers on each exchange are protected quotes under NMS
Rule 611 and cannot be traded-through. See supra Section III.C.1(a).
\794\ See supra note 38.
\795\ See supra note 39.
\796\ See supra note 40.
\797\ See supra note 41.
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The exchanges separately sell their individual market data directly
to market participants via proprietary data feeds. For example, the
exchanges have developed proprietary DOB products that provide greater
content (e.g., odd-lot quotations, orders at prices above and below the
best prices, and information about orders participating in auctions,
including auction order imbalances) at lower latencies,\798\ relative
to the exclusive SIPs, for certain segments of the data market, such as
automated trading systems. They have also developed proprietary TOB
products that provide data that is generally limited to the highest bid
and lowest offer and last sale price information at a lower price for
another segment of the data market that is less sensitive to latency
(e.g., retail or non-professional investors and wealth managers that
access market data visually).\799\ Proprietary data feeds are available
as part of exchanges' standard offerings. All exchanges, with the
exception of IEX,\800\ offer for sale as part of their proprietary DOB
products the complete set of orders at prices above and below the best
prices (e.g., depth of book data), complete odd-lot quotation
information, and information about orders participating in auctions,
including auction order imbalances (for listing exchanges).\801\
---------------------------------------------------------------------------
\798\ See, e.g., Nasdaq Global Data Products, Real-Time--NYSE
Proprietary Market Data, and Cboe Equities Exchanges Market Data
Product Offerings, supra note 19 (describing low-latency DOB data
products).
\799\ Examples of such proprietary TOB products include NYSE
BBO, Nasdaq Basic, and Cboe One Feed. See supra note 19. NYSE BBO
provides TOB data. Nasdaq Basic and Cboe One's Summary Feed provide
TOB and last sale information. Nasdaq Basic also provides Nasdaq
Opening and Closing Prices and other information, including
Emergency Market Condition event messages, System Status, and
trading halt information. Cboe One also offers a Premium Feed that
includes DOB data. Each of these products is sold separately by the
relevant exchange group. See TD Ameritrade Letter, supra note 19, at
5-8 (stating that the lower cost of exchange TOB products, coupled
with costs associated with the process to differentiate between
retail professionals and non-professionals imposed by the Equity
Data Plans, and associated audit risk, favors retail broker-dealer
use of exchange TOB products).
\800\ IEX makes proprietary data available but does not charge
for it. See, e.g., IEX, Market Data, available at https://iextrading.com/trading/market-data/ (last accessed Jan. 8, 2020);
Ramsay Letter II.
\801\ See supra note 335.
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One notable gap between SIP data and proprietary DOB data is that
SIP data does not include complete odd-lot quotation information even
though odd-lots represent a large share of all trades in the U.S. stock
market and can represent economically significant trading opportunities
at prices that are better than the prices of displayed and disseminated
round lots.\802\ While several exchanges aggregate odd-lot orders into
round lots and report such aggregated orders as quotation information
to exclusive SIPs,\803\ market participants must purchase proprietary
data feeds, available from the exchanges, to see the odd-lot quotations
that are priced better than the best bid or offer.\804\
---------------------------------------------------------------------------
\802\ See Alexander Osipovich, supra note 166.
\803\ See supra Section III.C.1(a). Exchange rules specify how
the aggregation process works in different terms and with different
levels of specificity, but many exchanges aggregate odd-lots across
multiple prices and provide them to the exclusive SIPs at the least
aggressive price if the combined odd-lot interest is equal to or
greater than a round lot. See supra notes 157, 158, 789.
\804\ See supra note 163.
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Odd-lot transactions make up a significant proportion of
transaction volume in NMS stocks, including ETPs. As discussed
above,\805\ based on data from the SEC's MIDAS analytics tool, the
daily exchange odd-lot rate (i.e., the number of exchange odd-lot
trades as a proportion of the number of all exchange trades) for all
corporate stocks ranged from approximately 29% to 42% of trades and the
daily exchange odd-lot rate for all ETPs ranged from 14% to 20% of
trades in 2018, with the daily exchange odd-lot rate for all corporate
stocks exceeding 50% several times in June 2019 (and exceeding 65%
several times for the top decile by price) and reaching almost 30% for
all ETPs in the same period.
---------------------------------------------------------------------------
\805\ See supra Section III.C.1(b).
---------------------------------------------------------------------------
Additionally, the staff analysis, referenced above, found that a
significant portion of quotation and trading activity occurs in odd-
lots, particularly for frequently traded, high-priced tickers, and that
as stock prices rise, the difference in spreads calculated using the
different feeds also rises, indicating that odd-lots are more likely to
set the best quote as stock prices rise.\806\ In addition, one
commenter provided data supporting the findings of the staff analysis
and showing that the odd-lot quotes provide superior pricing compared
to the SIP data.\807\ A panelist at the Roundtable stated that odd-lot
quotation data is needed to make effective decisions in trading
applications and to fill client orders effectively.\808\ The Commission
is unable to differentiate in the data between original round lot
quotes and odd-lot quotes that were aggregated by the exchanges to be a
round lot quote. The Commission invites comments on this issue.
---------------------------------------------------------------------------
\806\ Id. The staff analysis in Section III.C.1(b) found that
for the 500 top tickers by dollar volume, odd-lot quotes represented
a significant price improvement over the exclusive SIP quotes. This
analysis further found that as the price of the stock increased, the
duration-weighted amount by which the odd-lot quote improved on the
SIP quote increased as well.
\807\ See supra note 177 and accompanying text.
\808\ See supra note 173 and accompanying text.
---------------------------------------------------------------------------
Another gap between SIP data and proprietary DOB data is that SIP
data currently lacks quotation information in NMS stocks beyond the top
of book \809\ even though the decimalization of securities pricing in
2001 led to a dispersion of quoted volume away from the top of book.
Consequently, the NBBO currently shown in SIP data became less
informative and some market participants have come to view depth of
book data as necessary to their efforts to trade competitively and to
provide best execution to customer orders.\810\ Market participants
interested in such depth of book data must rely upon the proprietary
DOB products offered by the exchanges that include varying degrees of
depth data.\811\
---------------------------------------------------------------------------
\809\ See supra Section III.C.2.
\810\ See supra Section III.C.2(d).
\811\ See supra note 270.
---------------------------------------------------------------------------
A staff review of depth of book quotations for corporate stocks
using data from July 19, 2019, referenced above,\812\ revealed that
there is a substantial amount of quotation volume at several levels
below the best bid. During active parts of the trading day, there is
quotation interest at every $0.01 increment at least ten levels out for
the most liquid stocks; for the least liquid stocks, there is a large
gap between the best bid and the next highest bid and large gaps are
generally also present between the next several bid levels.
---------------------------------------------------------------------------
\812\ See supra Section III.C.2(d).
---------------------------------------------------------------------------
The Commission recognizes that market participants have diverse
market data needs. Depth of book data can assist SORs and electronic
trading systems with the optimal placement of orders across markets.
Specifically, depth of book data can help market participants improve
trading strategies and lower execution costs by placing liquidity
taking orders that are larger than the displayed best bid or best offer
[[Page 16814]]
and achieve queue priority for liquidity providing orders that post at
prices away from the best bid or offer.\813\ At the same time, the
depth of book data may be less valuable to a certain segment of market
participants (e.g., retail or non-professional customers). For example,
a relatively small portion of orders execute at prices outside the NBBO
indicating that some market participants do not find ``walking the
book'' useful.\814\
---------------------------------------------------------------------------
\813\ See id.; infra Section VI.C.1(b)(ii).
\814\ That is, an order so large that it executes against all
the volume at the top of the book and then executes against orders
behind the top of the book. See Craig W. Holden and Stacey Jacobsen,
Liquidity Measurement Problems in Fast Competitive Markets, 69 J.
FIN. 1760, at Table I (2014) (showing that 3.3% of orders clear
outside the NBBO). This does not necessarily mean that limit orders
outside the NBBO are irrelevant. There are limitations to using the
observation of trades at prices outside the NBBO at the time of
trade execution as an indicator for orders that executed at prices
outside of the NBBO at the time of trade order (specifically, these
events are not necessarily the same thing).
---------------------------------------------------------------------------
Finally, yet another gap between SIP data and proprietary DOB data
is that SIP data includes only limited auction-related information even
though auctions, especially opening and closing auctions, represent a
significant proportion of trading volume on the primary listing
exchanges.\815\ In particular, auctions account for approximately 7% of
daily equity trading volume.\816\ Auctions are important for the
implementation of passive investment strategies and generate prices
that are used for a variety of market purposes, including setting
benchmark prices for index rebalances and for mutual fund pricing. As
such, the Commission recognizes that auction information may be
valuable to a certain segment of market participants (e.g., those
market participants that participate or would participate in auctions).
---------------------------------------------------------------------------
\815\ See supra note 330.
\816\ See supra Section III.C.3(c); supra note 348.
---------------------------------------------------------------------------
Today, some NYSE auction data, such as pre-opening indicators,\817\
is disseminated through the CTA/CQ SIP, and no auction information
generated by the other primary listing exchanges is distributed through
the exclusive SIPs, except very limited LULD information related to
auction collar messages.\818\ Thus while the exchanges' proprietary
data includes detailed information on several aspects of their
auctions, only a small subset of the auction-related information is
included in SIP data.\819\
---------------------------------------------------------------------------
\817\ See NYSE Rule 15.
\818\ See supra note 333; UTP Plan, UTP Participant Input
Specification (Dec. 3, 2019), available at http://www.utpplan.com/DOC/UtpBinaryInputSpec.pdf.
\819\ See, e.g., NYSE, TAQ NYSE Order Imbalance--Quick Reference
Card, available at https://www.nyse.com/publicdocs/nyse/data/TAQ_NYSE_Order_Imbalance_QRC.pdf (last accessed Jan. 8, 2020).
---------------------------------------------------------------------------
While all listing exchanges make auction information available to
market participants through proprietary data feeds, only some exchanges
offer this information through specialized feeds for a lower price than
full DOB products. For instance, NYSE Order Imbalances is an example of
such proprietary auction data product offered by NYSE,\820\ while
Nasdaq does not offer such specialized product.\821\
---------------------------------------------------------------------------
\820\ See NYSE, Real-Time Data Imbalances, available at https://www.nyse.com/market-data/real-time/imbalances (last accessed Jan. 8,
2020) (describing the NYSE Order Imbalances product).
\821\ The Nasdaq Net Order Imbalance Indicator is a feature of
Nasdaq's BookViewer proprietary data feed product rather than a
stand-alone product. See Nasdaq, Net Order Imbalance Indicator,
available at https://data.nasdaq.com/NOII.aspx (last accessed Jan.
8, 2020).
---------------------------------------------------------------------------
Currently, the gap in information between data in the exclusive SIP
and proprietary DOB products may limit the current level of price
efficiency if market participants with access to proprietary DOB
products do not incorporate this information into prices quickly enough
through their trading or quoting activity.\822\ However, the Commission
does not know the extent of this possible effect.
---------------------------------------------------------------------------
\822\ See infra Section VI.D.1. Price efficiency is greater when
prices reflect current information faster.
---------------------------------------------------------------------------
(b) Current Process for Dissemination of SIP Data and Proprietary Data
Feeds
As discussed above,\823\ today SIP data is disseminated to
investors and market participants through a centralized consolidation
model with an exclusive SIP for each NMS stock, centrally collecting
market data transmitted from the dispersed SRO data centers and then
redistributing the consolidated market data to market participants who
are often in different locations. The SROs typically transmit their
market data through fiber optic cables to the SIPs.\824\
---------------------------------------------------------------------------
\823\ See supra Sections I, II.A.
\824\ See supra Section II.A.
---------------------------------------------------------------------------
Typically, proprietary data is transmitted directly from each
exchange to the data center of the subscriber and does not first travel
to a centralized consolidation location. Furthermore, unlike the
standardized transmission of SIP data over fiber optic cable,
proprietary data is frequently transmitted using low-latency wireless
connectivity or other forms of connectivity (often provided by the
exchanges) that are faster than fiber.\825\
---------------------------------------------------------------------------
\825\ Id.
---------------------------------------------------------------------------
There is a significant latency differential between SIP data and
the proprietary market data products that are delivered directly to
market participants or to market data aggregators who generally have
better connectivity, communications, and aggregation technology than
the SIPs.\826\ Specifically, the centralized consolidation model has
three sources of latency: (a) Geographic latency; (b) aggregation or
consolidation latency; and (c) transmission or communication latency.
The latency differentials between SIP data and proprietary data, in
their various forms, are meaningful as detailed below, and market
participants believe these differentials impact their ability to trade
and their order execution quality.\827\
---------------------------------------------------------------------------
\826\ See supra note 397; Bartlett and McCrary, supra note 418,
at 45.
\827\ See supra note 412 and accompanying text; Martin Scholtus
et al., Speed, algorithmic trading, and market quality around
macroeconomic news announcements, 38 J. BANKING & FIN. 89 (2014)
(``This paper documents that speed is crucially important for high-
frequency trading strategies based on U.S. macroeconomic news
releases. Using order-level data on the highly liquid S&P 500 ETF
traded on Nasdaq from January 6, 2009 to December 12, 2011, we find
that a delay of 300 ms or more significantly reduces returns of
news-based trading strategies.''); Grace Hu et al., Early peek
advantage? Efficient price discovery with tiered information
disclosure, 126 J. FIN. ECON. 399 (2017) (``Calibrating the speed of
price discovery at a finer scale, we find that the first
200;milliseconds at 9:54:58 accounts for 89% of the one-second
return at 9:54:58 on negative news days, and 85% of the one-second
return at 9:54:58 on positives news days. In other words, most of
the price discovery happens during the first 200 milliseconds,
faster than the blink of an eye.''); Tarun Chordia et al., Low
Latency Trading on Macroeconomic Announcements (Jan. 2016),
available at https://www.business.unsw.edu.au/About-Site/Schools-Site/banking-finance-site/Documents/Low-Latency-Trading-on-Macroeconomic-Announcements.pdf (``Trading in the direction of the
announcement surprise results in average dollar profits (across
market participants) of $19,000 per event for the S&P500 ETF.
Profits are larger for index futures, roughly $50,000 per event, yet
this dollar amount translates to just two basis points of return
relative to the $80 million of notional value traded in the
direction of the surprise, and our measured profits do not account
for commissions or the expense incurred in subscribing to real-time
data services.'').
---------------------------------------------------------------------------
Geographic latency refers to the time it takes for data to travel
from one physical location to another. Greater distances usually equate
to greater geographic latency, though geographic latency is also
affected by the mode of data transmission. The Commission understands
that geographic latency is typically the most significant component of
the additional latency that SIP data feeds experience compared to
proprietary data feeds.\828\ Because each exclusive SIP must collect
data from geographically-dispersed SRO data centers, consolidate the
data, and then
[[Page 16815]]
disseminate it from its location to end-users, which are often in other
locations, this hub-and-spoke form of centralized consolidation creates
additional latency.\829\ The Commission understands that the geographic
latency of SIP data may be up to a millisecond.\830\
---------------------------------------------------------------------------
\828\ See supra Section IV.A.
\829\ Id.
\830\ See supra note 396.
---------------------------------------------------------------------------
Aggregation or consolidation latency refers to the amount of time
an exclusive SIP takes to aggregate the multiple sources of SRO market
data into SIP data and includes the time it takes to calculate the
NBBO. This latency reflects the time interval between when an exclusive
SIP receives data from an SRO and when it disseminates consolidated
data to the end-user. Even though in recent years the exclusive SIPs
made improvements to address aggregation latency, the related latency
differential remains: as mentioned above, in the second quarter of
2019, for Tapes A and B average quote feed and average trade feed
aggregation latencies were 69 and 139 microseconds, respectively.\831\
In the same time period, the Tape C aggregation latency was an average
of 16.9 microseconds for quotes and 17.5 microseconds for trades.\832\
Notably, these latency differentials remain even though the Equity Data
Plans' operating committees have made some improvements to certain
aspects of the exclusive SIPs and related infrastructure, including
improvements to address aggregation latency.\833\
---------------------------------------------------------------------------
\831\ See supra Section IV.A.
\832\ Id.
\833\ Id.
---------------------------------------------------------------------------
Although exclusive SIPs are tasked with calculating and
disseminating the NBBO, at each particular instant the NBBO being used
by various market participants could be different due to market
participants using proprietary data feeds. In particular, because of
geographic and aggregation latencies, market participants that
aggregate proprietary data feeds internally or that purchase
proprietary data feeds from market data aggregators are likely to have
NBBO quotes different from each other and different from the NBBO quote
distributed by the exclusive SIPs.
Transmission latency refers to the time interval between when data
is sent (e.g., from an exchange) and when it is received (e.g., at an
exclusive SIP and/or at the data center of the subscriber), and the
transmission latency between two fixed points is determined by the
transmission communications technology through which the data is
conveyed. Transmission latency also varies depending on the geographic
distance between where the data is sent and where it is received. There
are several options currently used for transmitting market data, such
as fiber optics, which typically are used by the exclusive SIPs for
receipt and dissemination of SIP data, and wireless microwave
connections, which the exchanges offer as an alternative for their
proprietary data feeds but not for SIP data.\834\ Fiber optics are
generally more reliable than wireless networks since the data signal is
less affected by weather. The modes of transmission for SIP data are
typically slower than the modes of transmission used for proprietary
data. For instance, the Commission understands that currently each of
the CTA/CQ Plan participants must transmit its data through
connectivity options that have a round-trip latency of at least 280
microseconds.\835\
---------------------------------------------------------------------------
\834\ Id.
\835\ See supra note 410.
---------------------------------------------------------------------------
The Commission preliminarily believes that the benefits of greater
speed on the timescales at which the market currently measures latency
have mostly to do with being faster than one's competitors. That is,
the Commission understands that a speed increase on the microsecond
timescale is less useful unless it makes a market participant faster
than its rivals in the market. This means that in some situations small
latency differentials that leave enough time for certain market
participants to observe and react to information before other, slower
market participants can be as costly to slower market participants as
larger latency differentials.\836\
---------------------------------------------------------------------------
\836\ Academic literature examines the effects of trading speed
on revenues, adverse selection, and liquidity. See, e.g., Matthew
Baron et al., Risk and Return in High-Frequency Trading, 54 J.Fin. &
Quantitative Analysis 993 (2019) (testing the connection between
high frequency trading (``HFT'') latency and trading performance;
the authors find that relative latency matters and that ``HFT firms
exhibit large, persistent cross-sectional differences in
performance, with trading revenues disproportionally accumulating to
a few firms.'' Furthermore, when HFT firms use their relative
latency advantages to trade on news to create short-term arbitrage
opportunities, they generate adverse selection on slower traders.);
Bruno Biais et al., Equilibrium fast trading, 116 J. Fin. Econ. 292
(2015) (arguing that fast trading technology ``provides advance
access to value-relevant information, which creates adverse
selection, lowering welfare,'' and ``generates a negative
externality''); Thierry Foucault et al., Toxic Arbitrage, 30 Rev.
Fin. Stud. 1053 (2017) (providing evidence that ``[a]rbitrage
opportunities due to asynchronicities in the adjustment of prices to
news are toxic because they expose dealers to the risk of trading
with arbitrageurs at stale quotes.'' The authors then claim that
these toxic arbitrage opportunities that come with higher trading
speed impair market liquidity.).
---------------------------------------------------------------------------
Currently, some market participants obtain proprietary data feeds
from many SROs.\837\ Of these market participants, some prefer to have
consolidated proprietary data. There are two ways these market
participants can obtain consolidated data. First, market participants
may independently create consolidated data by purchasing individual
exchange proprietary market data products and consolidating that
information for their own use.
---------------------------------------------------------------------------
\837\ The exchanges, as a subset of SROs, sell proprietary data
feeds to market participants.
---------------------------------------------------------------------------
Second, market participants may obtain consolidated data from
market data aggregators, which are mostly firms that purchase direct
access to exchange data,\838\ consolidate the data, and disseminate the
data (after various levels of processing) to market participants.\839\
Additionally, some market data aggregators do not purchase direct
access to exchanges. Instead they provide hardware and software for
market data aggregation to the parties that have contractual
relationships to purchase or license the market data. These market data
aggregators offer the opportunity for market participants to outsource
the significant hardware, software, and personnel expertise that is
required to consolidate the proprietary feeds directly. The products
provided by these market data aggregators are used by many of the most
sophisticated market participants in the market, and despite the fact
that they create an additional chain link between market participants
and proprietary feeds, the Commission preliminarily believes that these
firms still deliver the data to the market participants faster than the
exclusive SIPs.\840\
---------------------------------------------------------------------------
\838\ As mentioned below, even when obtaining consolidated
market data from market data aggregators, market participants also
have to pay data fees directly to the exchanges. See infra Section
VI.B.2(c).
\839\ Market participants who consolidate market data
independently may use other market data aggregators' products and
services such as software.
\840\ See, e.g., Roundtable Day One Transcript at 128-129 (Mark
Skalabrin, Redline Trading Solutions).
---------------------------------------------------------------------------
(c) Current Costs of Generating SIP Data and Proprietary Data Feeds
As mentioned above,\841\ currently the exclusive SIPs consolidate
and disseminate SIP data to market participants. The data fees that
exclusive SIPs charge to market participants for obtaining SIP data are
set by the operating committees of the Equity Data Plans.\842\ A
portion of the
[[Page 16816]]
SIP data revenues is used to pay for the cost of maintaining and
administering the exclusive SIP,\843\ and the remaining funds are
distributed to the SRO members proportionately to their trading and
quoting activity.\844\ In the case of the UTP SIP, there is an
additional FINRA cost for the oversight of the OTC markets that is also
taken out of the exclusive SIP's revenues before distributing funds to
the plan participants.
---------------------------------------------------------------------------
\841\ See supra Section VI.B.1.
\842\ Currently, these fees are immediately effective on filing,
although the Commission has the ability to abrogate them. See Rule
608(b)(3)(i) and (iii), 17 CFR 242.608(b)(3)(i) and (iii). The
Commission recently proposed to amend Rule 608 to rescind the
effective-on-filing nature of the fees and make them subject to the
procedures in Rule 608(b)(1) and (2) for NMS plan amendments. If
adopted as proposed, the Commission would publish a proposed fee and
provide an opportunity for public comment on the proposed fee, and
the proposed fee would not become effective unless approved by the
Commission. See Effective on Filing Proposal, supra note 37.
\843\ Once an exclusive SIP is selected, upgrades to that
processor's SIP infrastructure are mandated and funded by the
operating committee of the relevant Equity Data Plan. This comes out
of SIP revenues distributed to the SROs.
\844\ The market data revenue allocation formula is summarized
at, e.g., UTP Plan, Summary of Market Data Revenue Allocation
Formula, available at http://www.utpplan.com/DOC/Revenue_Allocation_Formula.pdf (last accessed Jan. 8, 2020). FINRA
rebates a portion of the SIP revenue it receives back to broker-
dealer internalizers and ATSs based on the trade volume they report.
See FINRA Rule 7610B. One Roundtable commenter estimated that from
2013 to 2017, through the Nasdaq/UTP plan, the FINRA/Nasdaq TRF gave
83 percent of SIP revenue it received to broker-dealers. See Wittman
Letter, supra note 290, at 19.
---------------------------------------------------------------------------
Exclusive SIP revenues from data fees totaled more than $430
million in 2017.\845\ There are three broad categories of SIP data
fees: Access fees, content fees, and distribution/redistribution
fees.\846\ An access fee is a flat monthly fee for physical
connectivity to SIP data and does not depend on the type of market
participant (e.g., market data vendor vs. institutional broker).
---------------------------------------------------------------------------
\845\ See Proposed Governance Order, supra note 8.
\846\ See, e.g., CTA Plan, Q3 2019 CTA Quarterly Revenue
Disclosure, available at https://www.ctaplan.com/publicdocs/Q3_2019_CTA_Quarterly_Revenue_Disclosure.pdf; Nasdaq UTP Plan, Q3
2019 UTP Quarterly Revenue Disclosure, available at http://www.utpplan.com/DOC/UTP_Revenue_Disclosure_Q32019.pdf; Jones Letter,
supra note 291.
---------------------------------------------------------------------------
There are three categories of content fees that depend on how
market participants access SIP data. First, if SIP data is displayed
for market participants on computer screens or other devices, the
market participant is charged a display fee (a professional or a non-
professional subscriber fee depending on the type of market
participant). These fees can be per screen displaying the data, per
user as part of the multi instance single user (MISU) program, and per
application where multiple applications can run on one screen. Second,
if SIP data is not displayed on computer screens and instead is
directly sent to an automated system such as a trading algorithm or a
smart order router, then the market participant is charged a non-
display fee. Display and non-display fees are monthly fees and entitle
the subscriber to an unlimited amount of real-time market information
during the month. In 2018, around 65% to 75% of total SIP revenue was
accounted for by professional and non-professional display fees, and
around 8% to 13% of revenue was accounted for by non-display fees.\847\
A third type of content fee is the query quote fee, which are fees
collected from market participants accessing SIP data on a per quote
basis. Under the per-query fee structure, subscribers are required to
pay an amount for each request for a packet of real-time market
information. Around 4% to 10% of total SIP revenue is accounted for by
quote query fees in 2018.\848\ Finally, exclusive SIPs charge
distribution/redistribution fees when the market data is delivered to a
user other than the initial purchaser.
---------------------------------------------------------------------------
\847\ Id.
\848\ Id.
---------------------------------------------------------------------------
Based on the exclusive SIPs' public disclosures, as of fourth
quarter of 2018 there were approximately 2-3 million non-professional
subscription use cases and approximately 0.3 million professional
subscription use cases across the UTP and CTA/CQ SIPs. Additionally,
there were approximately 300 non-display vendor use cases at each of
the exclusive SIPs.\849\ The Nasdaq UTP SIP operating expenses totaled
around $7 million in 2017.\850\ The CTA/CQ SIP operating expenses
totaled around $8.8 million in 2018.
---------------------------------------------------------------------------
\849\ See supra note 789.
\850\ Operating expenses for the Nasdaq UTP Plan represent
support costs, paid to the SIP, and are a pre-determined amount
agreed upon by the Nasdaq UTP Plan's SRO participants. The Nasdaq
UTP SIP costs do not include the costs of the exchanges generating
the data they send to the Nasdaq UTP SIP. The UTP Plan also incurs
administrative costs and other miscellaneous expenses, which
together totaled around $3.6 million.
---------------------------------------------------------------------------
The Commission preliminarily believes that there is a substantial
difference between the fees market participants pay for SIP data and
the fees they pay for proprietary DOB data products. For instance,
monthly non-display fees charged by the CTA/CQ SIP is $2,000 for
Network A and $1,000 for Network B,\851\ while monthly non-display fees
charged by NYSE as part of proprietary data feed is $20,000,\852\ which
is an order of magnitude larger than the SIP data fee. Additionally,
proprietary data feed fees have increased significantly over the past
decade. For instance, SIFMA estimates that between 2010 and 2018 data
fees charged by some exchanges went up by three orders of magnitude or
more.\853\ In comparison, SIP data fees went up by 5% during the same
time period.\854\ Based on Commission staff experience, the Commission
understands that the number of subscribers to proprietary market data
is relatively small.\855\ The Commission understands that the number of
subscribers of proprietary market data and proprietary market data
revenues vary across exchanges and that some exchanges obtain a larger
percentage than other exchanges of their total market data revenue from
proprietary data products (as opposed to revenue from SIP data
products). For example, the Commission estimates that in 2018, NYSE
collected approximately 5% of its net revenues from selling proprietary
market data products. On the other hand, according to the Commission's
estimates, Cboe BYX collected approximately 9% of its revenues from
selling proprietary market data products.\856\
---------------------------------------------------------------------------
\851\ See CTA Plan, Schedule of Market Data Charges (Jan. 1,
2015), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/Schedule%20Of%20Market%20Data%20Charges%20-%20January%201,%202015.pdf.
\852\ See SIFMA Letter.
\853\ See SIFMA Letter.
\854\ SIFMA's study submitted in connection with the Roundtable
contained analysis examining the change in fees that some broker-
dealers paid for CTA SIP data between 2010 and 2018. The analysis
showed that CTA SIP fees for most categories of data increased by an
average of 5% between 2010 and 2018. However, the change in the
total amount each broker-dealer spent on CTA SIP data varied based
on the type of broker-dealer. The analysis found that the average
amount of money spent on CTA SIP data by retail broker-dealers
declined by 4% between 2010 and 2017, but the average amount spent
by institutional broker-dealers increased by 7%. See id. at 21-28.
\855\ See supra note 140.
\856\ See infra Section VI.B.2(d). The Commission estimates are
based on NYSE and Cboe BYX's Form 1 filings and UTP and CTA/CQ
revenue metrics. NYSE's Form 1 filings disclose $968 million as its
net revenues in 2018. NYSE's revenues from the SIP redistribution is
approximately $47 million. Note 2 to the exchange's financial
statements states that NYSE collects market data revenues from the
exclusive SIPs and ``to a lesser extent for (sic) New York Stock
Exchange proprietary data products,'' indicating that the
approximately $47 million in revenues from SIP data could be a
benchmark for their proprietary market data revenues. NYSE Form 1,
available at https://www.sec.gov/Archives/edgar/vprr/1900/19003689.pdf (last accessed Jan. 29, 2020). Similarly, Cboe BYX Form
1 filings report $58 million in net revenues. Of this $58 million,
$26 million were market data revenue--approximately $21 million from
SIP data revenues and $5 million from proprietary market data
revenues. Cboe BYX Form 1, available at https://www.sec.gov/Archives/edgar/vprr/1900/19003669.pdf (last accessed Jan. 29, 2020).
---------------------------------------------------------------------------
As mentioned above,\857\ market participants who purchase
proprietary data feeds from multiple SROs may
[[Page 16817]]
choose to self-aggregate multiple data feeds, or, alternatively, they
can purchase already consolidated data from market data aggregators.
The exchanges charge a data fee to any market participant that
purchases exchanges' data from market data aggregators.\858\ Therefore,
these fees are effectively a part of the total price that a market
participant must pay when purchasing data from a market data
aggregator. In some cases, these fees may be so high that only a subset
of market participants can afford to self-aggregate proprietary feeds
from all exchanges or purchase market data aggregator products.\859\
The Commission preliminarily believes that more active market makers
and some sophisticated broker-dealers including a number of HFT firms
and some of the larger banks with proprietary data feed trading desks
either self-aggregate or purchase aggregation services or products from
third-party vendors.
---------------------------------------------------------------------------
\857\ See supra Section VI.B.2(b).
\858\ Some exchanges charge redistribution fees or their
equivalents to market data aggregators and separately, one or more
data fees (based on different use cases such as professional or non-
professional, display or non-display) to market participants who
purchase the exchanges' data from market data aggregators. See Virtu
Letter I, at 16-79 (Exhibit ``A,'' lists of data and connectivity
fees by several exchanges).
\859\ See, e.g., Roundtable Day One Transcript at 128-129 (Mark
Skalabrin, Redline Trading Solutions).
---------------------------------------------------------------------------
Based on Commission staff expertise, the Commission understands
that the data fees the exchanges charge to market participants that
purchase the exchanges' data from market data aggregators may account
for a significant portion of the total price market participants pay
for the market data aggregators' data products. However, the Commission
does not have information on the pricing of market data aggregators'
data and cannot break down market data product prices between the
direct data fees charged by the exchanges and the fees charged by
market data aggregators for their services; the Commission invites
comments on the issue.
Among other fees, the exchanges charge fees for various
connectivity services they offer (e.g., co-location, fiber
connectivity, and wireless connectivity). Connectivity services permit
a customer to access an exchange's proprietary market data and/or its
trading and execution systems as well as SIP data. The purchase and use
of certain connectivity services is necessary to directly access an
exchange's market data and to directly participate in that market, at
least for those market participants that represent the vast majority of
trading activity on exchanges. Additionally, these connectivity
services may be needed in order to take advantage of the reduced
latencies offered by the proprietary data feeds, including when market
participants prefer the contents of SIP data consolidated from the
proprietary data feeds--rather than delivered by an exclusive SIP--to
avoid additional latencies.
Connectivity fees can be substantial. For instance, the annual
fiber connectivity fees per port at the exchanges' primary data centers
are $90,000 at Cboe, $120,000 at Nasdaq, and $168,000 at NYSE.\860\ Co-
location services may have two components: An initial fee and an
ongoing monthly fee based on the kilowatt (kW) usage. For example, at
NYSE an initial fee for a dedicated high-density cabinet that consumes
9kW per month is $5,000, and an ongoing monthly fee per kW is
$1,050.\861\ At Nasdaq, an initial fee is $3,500, and an ongoing
monthly fee is $4,500.\862\ Thus, for a year of co-location in a
dedicated cabinet with 9kW power, these fees add up to over $118,000
for NYSE and over $57,000 for Nasdaq.
---------------------------------------------------------------------------
\860\ See Letter to Brent J. Fields, Secretary, Commission, from
Brad Katsuyama, CEO, Investors Exchange LLC, at Table 7 (Jan. 29,
2019) (``Katsuyama Letter II'') (10Gb fiber connectivity).
\861\ See NYSE price list 2020, supra note 408.
\862\ See Nasdaq, Price List--Trading Connectivity, available at
https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2 (last
accessed Dec. 19, 2019).
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(d) Current Aggregate Exchange Revenues From Selling Market Data and
Connectivity
The Commission estimates that in 2018 the exchanges earned a total
revenue of approximately $941 million from selling both proprietary and
SIP market data products and connectivity services in the equities
market. In addition, the Commission estimates that the exchanges earned
approximately $596 million of this $941 million revenue from selling
market data products and approximately $345 million of this revenue
from selling connectivity services. With respect to the revenue from
market data products, the Commission estimates that in 2018 the
exchanges earned approximately $327 million of the $596 million revenue
from equity SIP data and approximately $269 million from selling
proprietary data products. Further, approximately $63 million of the
$327 million equity SIP revenue in 2018 was distributed to FINRA.\863\
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\863\ When taking this $63 million into account, total SIP
revenues shared by SROs were approximately $390 million in 2018,
which is consistent with the $430 million estimate for 2017 noted in
the Proposed Governance Order (which also included the amount paid
to the plan processor). See supra note 845 and accompanying text.
This estimate is also consistent with the $387 million estimate for
2017. See Jones Letter, supra note 291, at 25.
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The Commission's estimates above are mainly based on revenue
information that the exchanges submitted as part of their Form 1
filings.\864\ In addition, the Commission used SIP revenue information
disclosed by the CTA/CQ Plans and the Nasdaq UTP Plan in their
quarterly revenue disclosures.\865\ Furthermore, because revenue
information provided by some exchanges in their Form 1 filings is not
sufficiently detailed for this calculation, the Commission had to make
certain assumptions in order to derive these estimates. First, the Form
1 filings for NYSE and NYSE MKT combine revenue from connectivity fees
with revenue from market data fees. For these exchanges, the Commission
derived the revenue earned from connectivity fees by assuming that the
revenue that these exchanges earn from proprietary data is slightly
smaller than the revenue that they earn from SIP data (based on notes
in their Form 1 filings which indicate that SIP revenue exceeds
proprietary data revenue). Second, the Form 1 filing for Nasdaq
combines revenue from connectivity fees with revenue from transaction
fees. The Commission derived the revenue that Nasdaq earned from
connectivity fees by assuming that Nasdaq's revenues from connectivity
fees and transaction fees were in the same proportion to one another as
NYSE's revenues from these two business lines. Third, Form 1 filings
for exchanges that offer trading in both equities and options provide
revenue information for these two asset classes combined. For these
exchanges, the Commission assumed that their combined revenues from
market data fees and connectivity fees in the equities market and in
the options market were in the same proportion to one another as the
market data and connectivity revenues that these exchanges would have
earned in each of these markets based on their dollar volume market
share (as compared to the dollar volume market share of the exchanges
that trade only equities or only options).
---------------------------------------------------------------------------
\864\ See Commission, National Securities Exchange Periodic
Amendments to Form 1 (Modified June 20, 2019), available at https://www.sec.gov/rules/national-securities-exchanges-amendments.htm
(providing links to exchanges' Form 1 filings).
\865\ See supra note 846.
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3. Competition Baseline
This section discusses, as it relates to this rulemaking, the
current state of the market for core and SIP data products, the market
for proprietary data
[[Page 16818]]
products, the market for connectivity services, and the market for
trading services as well as broker-dealers' competitive strategies for
trading services.
(a) Current Structure of Market for Core and SIP Data Products
As discussed above,\866\ under the NMS plans, SIP data is
collected, consolidated, processed, and disseminated by the exclusive
SIPs.\867\ Equity Data Plan operating committees, which are composed of
the SROs, set the fees the exclusive SIPs charge for SIP data.\868\ Any
revenue earned by the exclusive SIPs, after deducting their operating
costs and FINRA's OTC oversight costs, is split among the SROs. FINRA
rebates a portion of the exclusive SIP revenue it receives back to
broker-dealer internalizers and ATSs based on the trade volume they
report.\869\
---------------------------------------------------------------------------
\866\ See supra Section II.A.
\867\ Id.
\868\ See supra note 842 and accompanying text.
\869\ See supra note 844.
---------------------------------------------------------------------------
The fact that Equity Data Plan operating committees approve all NMS
plan proposed fee changes can create conflicts of interest for the SROs
because their duties administering NMS plans that either charge or
could charge fees could potentially come into conflict with other
products the SROs sell or costs they incur as part of their businesses.
For example, some of the SROs sell proprietary data products that are
considered by some to be substitutes for SIP data. This can create a
conflict of interest regarding the three NMS plans that set fees for
SIP data because the SROs vote to set SIP fees, own and control the
dissemination of data, and set the prices of some of the proprietary
data products the exclusive SIPs may compete against.
As discussed in detail above, each Equity Data Plan selects a
single exclusive SIP through a bidding process to be the exclusive
distributor of the NMS plan's data.\870\ This grants the SIP a monopoly
franchise in the distribution of the NMS plan's data, which means that
the SIPs may not be subject to competitive forces. The Commission
acknowledges that there is uncertainty about this conclusion. In
particular, the economic literature provides theory and evidence that
could predict either more efficient or less efficient outcomes under a
monopoly structure. A paper by Demsetz would predict that the current
monopolistic structure is most efficient.\871\ In industries where
there are economies of scale, a monopoly structure may lead to the most
efficient means of production. This profile applies to the distribution
of core data because of the high fixed costs.\872\ Demsetz (1968)
argues that just because an industry has a monopolistic provider of a
service does not mean that it is not subject to competitive forces. In
particular, Demsetz (1968) argues that if the monopolistic provider of
a service is subject to competition in the bidding process it could
provide sufficient competitive incentives to achieve a competitive
outcome. However, many theories provide examples of situations in which
the monopolistic structure is less efficient than other
structures.\873\ The Commission does not believe that the exclusive SIP
bidding process provides sufficient competitive incentives for three
reasons. First, the bidding process could be subject to conflicts of
interest since some of the SROs voting to select the exclusive SIP are
also bidding to be the SIP. Second, the contracts are not bid out
regularly, so there may not be a significant chance that the current
exclusive SIP will be replaced. Third, historically in some cases the
bidding process may not be competitive due to the number of bidders.
Therefore, the Commission does not believe that the bidding process for
exclusive SIPs is likely to produce the most efficient outcome and
subject the exclusive SIPs to competitive forces.
---------------------------------------------------------------------------
\870\ See supra Section IV.A.
\871\ See Harold Demsetz, Why Regulate Utilities?, 11 J.L. &
Econ. 55 (1968) (``Demsetz (1968)'').
\872\ See infra note 882 and accompanying text.
\873\ See, e.g., Oliver E. Williamson, Franchise Bidding for
Natural Monopolies--in General and with Respect to CATV, 7 The Bell
J. Econ. 73 (1976) (discussing why bidding for monopolies may not
work well); Robin A. Prager, Firm behavior in franchise monopoly
markets, 21 Rand J. Econ. 211 (1990).
---------------------------------------------------------------------------
The exclusive SIPs have significant market power in the market for
core and aggregated market data products and are monopolistic providers
of certain information, which means that for all such products they
would have the market power to charge supracompetitive prices. Fees for
core data are paid by a wide range of market participants, including
investors, broker-dealers, data vendors, and others.
One reason the exclusive SIPs have significant market power is
that, although some market data products are comparable to SIP data and
could be used by some core data subscribers as substitutes for SIP data
in certain situations, these products are not perfect substitutes and
are not viable substitutes across all use cases. For example, as
mentioned above, some market data aggregators buy direct depth of book
feeds from the exchanges and aggregate them to produce products similar
to SIP data.\874\ However, these products do not provide market
information that is critical to some subscribers and only available
through the exclusive SIPs, such as LULD plan price bands and
administrative messages.\875\ Additionally, some SROs offer top of book
data feeds, which may be considered by some to be viable substitutes
for SIP data for certain applications.\876\ However, broker-dealers
typically rely on the SIP data to fulfill their obligations under Rule
603 of Regulation NMS, i.e., the ``Vendor Display Rule,'' which
requires a broker-dealer to show a consolidated display of market data
in a context in which a trading or order routing decision can be
implemented.\877\
---------------------------------------------------------------------------
\874\ The feeds produced by market data aggregators offer
additional features, such as lower latency, but usually cost more
than SIP data. See Roundtable Day One Transcript at 126-129 (Mark
Skalabrin, Redline Trading Solutions).
\875\ See supra Section III.D, III.E.
\876\ In the equity markets, the top of book feeds offered by
the SROs are usually cheaper than SIP data. However, they may only
contain information from one exchange, or one exchange family. See,
e.g., Nasdaq Basic, supra note 19; CBOE One, supra note 19; NYSE
BQT, supra note 19; TD Ameritrade Letter, supra note 19 (stating
that the lower cost of exchange TOB products, coupled with costs
associated with the process to differentiate between retail
professionals and non-professionals imposed by the SIP Plans, and
associated audit risk, favors retail broker-dealer use of exchange
TOB products).
\877\ See Vendor Display Rule, Rule 603 of Regulation NMS; supra
Section IV.B.2(a).
---------------------------------------------------------------------------
The purchase of SIP data or proprietary market data from all
exchanges, either directly or indirectly, is necessary for all market
participants executing orders in NMS securities.\878\ SROs have
significant influence over the prices of most market data products. For
example, the exchanges individually set the pricing of the top of book
data feeds that they sell to market data aggregators and broker-dealers
that self-aggregate who in turn generate consolidated data. At the same
time, SROs collectively, as participants in the national market system
plans, decide what fees to set for SIP data.\879\ Although market data
aggregators might compete with the exclusive SIPs by offering products
that provide consolidated data, they ultimately derive their data from
the exchanges' direct proprietary data feeds, whose prices are set by
the exchanges, a subset of SROs.\880\
---------------------------------------------------------------------------
\878\ For example, Rule 611(a) of Regulation NMS requires
trading centers to establish policies and procedures to prevent
trade-throughs. In order to prevent trade-throughs, executing
broker-dealers need to be able to view the protected quotes on all
exchanges. They can fulfill this requirement by using SIP data,
proprietary data feeds offered by the SROs, or a combination of
both.
\879\ See supra note 842.
\880\ Pursuant to Section 19(b) of the Exchange Act and Rule
19b-4 thereunder, SROs must file with the Commission proposed rules,
in which they set prices for their direct feed data. Those prices
can vary depending on the type of end user.
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[[Page 16819]]
Regarding the level of competition among non-SRO market data
aggregators that sell consolidated data to market participants, the
Commission currently does not have a precise estimate of the number of
players in this market and does not know how specialized these players
are.\881\ The Commission invites comments on this issue.
---------------------------------------------------------------------------
\881\ The Commission assumes that certain entities from the list
of market data vendors published on Nasdaq's website currently
perform the market data aggregator function. See supra note 516.
---------------------------------------------------------------------------
Additionally, the production of both core data and proprietary data
feeds involves relatively high fixed costs and low variable costs.\882\
Fixed costs are composed of, among others, costs to set up
infrastructure, regulatory approval costs, software development costs,
administrative costs and overhead costs, while variable costs include
costs to contract with and establish connectivity to each customer.
Importantly, fixed costs of the production of both core data and
proprietary data feeds are not specific to the production of data but
also support the exchanges' other services such as intermediating
trade. In such markets, the firms have additional incentives to
increase the number of their customers in order to spread the fixed
cost across a larger base of consumers.
---------------------------------------------------------------------------
\882\ See, e.g., Paul M. Romer, Endogenous Technological Change,
98 J. Pol. Econ. S71-102 (1990) (pointing out that information is
fundamentally distinct from other goods because it has a fixed cost
of discovery and a near zero cost of replication).
---------------------------------------------------------------------------
(b) Current Structure of Market for Proprietary Market Data Products
In addition to SIP data, the exchanges voluntarily disseminate
proprietary data and charge fees for this data. As noted above,\883\
the proprietary DOB products are generally characterized as fast, low
latency products designed for automated trading systems that include
additional content, such as depth of book data, while proprietary TOB
products are limited in content, such as the exchange's top of book
quotation information and transaction information and are designed
largely for the non-automated segment of the market (e.g., non-
professional investors and wealth managers that access market data
visually). Proprietary DOB products typically include odd-lot
quotations, orders at prices above and below the best prices (i.e.,
depth of book data), and information about orders participating in
auctions, including auction order imbalances.
---------------------------------------------------------------------------
\883\ See supra Section II.A.
---------------------------------------------------------------------------
Proprietary data fees have increased significantly over the past
decade, as suggested by SIFMA estimates that show that, for some
broker-dealers, data fees charged by some exchanges went up by three
orders of magnitude or more between 2010 and 2018.\884\
Correspondingly, exchanges' revenues from selling proprietary data and
connectivity services also went up over the last several years. For
example, Budish, et al. (2019) observe that exchanges earn significant
revenues from selling proprietary data (as well as connectivity
services).\885\ According to NYSE's Form 1 filings, its revenues from
data services (including connectivity revenues but excluding SIP data
revenues) increased approximately 93% from 2014 to 2018. Similarly,
Nasdaq's Form 1 filings show an approximately 21% increase in their
revenues from data services (excluding revenues from connectivity
services and SIP data revenues). On the other hand, during the same
period, revenues distributed back to NYSE by the exclusive SIPs
increased approximately 18% and the revenues distributed back to Nasdaq
increased approximately 12%. The exchanges' differences in their
reporting of these numbers make it difficult to compare revenue numbers
across exchanges. However, for both of these exchanges, their revenues
from the proprietary data and connectivity business have been growing
faster than the revenues they collect from SIP data.\886\
---------------------------------------------------------------------------
\884\ See SIFMA Letter; Virtu Letter I, at 4 (discussing double
``dipping'' on fees by the exchanges).
\885\ See Eric Budish et al., supra note 15.
\886\ According to its 2014 Form 1 filing, NYSE collected
approximately $138 million as market data revenues, covered under
the ``data services fees'' income statement line item. According to
the notes to NYSE's financial statements, these market data revenues
include proprietary data revenues, SIP data revenues, and revenues
from connectivity services. NYSE's same revenue line item increased
to approximately $236 million by the end of 2018. Whereas during
this same time period, the revenues NYSE collected from the
exclusive SIPs went from approximately $40 million to approximately
$47 million. Nasdaq's 2014 Form 1 filing discloses approximately
$206 million in ``information services'' line item in its income
statement. According to the footnotes to its financial statements,
this line item includes Nasdaq's market data revenues and
redistributed SIP revenues but does not include connectivity service
revenues. In its 2018 Form 1 filing, Nasdaq disclosed $242 million
in revenues under the same information services line item. During
the same time period, Nasdaq's SIP data revenues went up from
approximately $76 million to $85 million, a smaller revenue increase
relative to its market data revenues.
---------------------------------------------------------------------------
Indicia that exchanges may not be subject to robust competition
include that many broker-dealers state that even in the face of
increasing proprietary data fees they feel compelled to buy proprietary
data to be able to provide competitive trading strategies for their
clients.\887\ Additionally, some academic research suggests that each
particular exchange's proprietary data has no substitutes for some uses
of the data and no perfect substitutes for any uses. For example,
Budish et al. (2019) conclude that each exchange has market power with
respect to the data products (and the speed technology) specific to
that particular exchange because of a lack of substitutes for many
applications of their data.\888\
---------------------------------------------------------------------------
\887\ See supra note 598.
\888\ See Eric Budish et al., supra note 15.
---------------------------------------------------------------------------
(c) Current Structure of Market for Connectivity Services
Exchanges are exclusive providers of their own connectivity
services, and for many market participants, effective trading
strategies require connecting to many if not all of the exchanges,
making their demand for these connectivity services less elastic (i.e.,
less sensitive to price changes). The Commission examined data on
exchange orders that shows that large broker-dealers (as measured, for
example, by the number of messages sent to exchanges) connect to all or
almost all exchanges.\889\ This is consistent with commenters' and
Roundtable participants' stated view that in order to avoid a
competitive disadvantage, market participants have little choice but to
purchase direct connectivity services from multiple SROs.\890\
---------------------------------------------------------------------------
\889\ Based on the sample of audit trail data made available to
the Commission by FINRA, firms that are connected to all exchanges
account for 76.6% of the message volume (there are 37 such firms out
of a total of 327 firms in the sample). Firms that are connected to
at least all but one of the exchanges account for 91.6% of the
message volume (there are 50 such firms). The FINRA data sample
covers the week of December 5, 2016, and includes messages sent to
11 exchanges (NYSE National and Chicago Stock Exchange are not part
of this sample).
\890\ See supra Section III.C.2(c); supra Section II.A.
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As mentioned above, the exchanges offer different connectivity
options to transmit market data to market participants. These options
may include fiber optics connections, wireless microwave connections,
and laser transmission, all of which vary in speeds and
reliability.\891\ The fastest and more reliable connections (e.g.,
laser transmission) offer market participants an advantage over other
market participants with slower or less reliable connections.
Therefore, the Commission preliminarily believes that the
[[Page 16820]]
exchanges have incentives to offer multiple levels of connectivity so
that the fastest connections have the least elastic demand and the
exchanges could charger higher prices for these connections.
---------------------------------------------------------------------------
\891\ See supra Section II.A.
---------------------------------------------------------------------------
(d) Current Structure of the Market for Trading Services in NMS Stocks
The market for trading services is served by exchanges, ATSs, and
liquidity providers. The market relies on competition to supply
investors with execution services at efficient prices. These trading
venues, which compete to match traders with counterparties, provide a
framework for price negotiation and disseminate trading information.
The market for trading services in NMS stocks currently consists of 16
national securities exchanges, as well as off-exchange trading venues
including wholesalers \892\ and 33 NMS stock alternative trading
systems.\893\
---------------------------------------------------------------------------
\892\ Wholesalers are broker-dealers that pay retail brokers for
sending their clients' orders to the wholesaler to be filled
internally (as opposed to sending the trade orders to an exchange).
Typically a wholesaler promises to provide price improvement
relative to the NBBO for filled orders.
\893\ As of February 7, 2020, 33 NMS stock ATSs are operating
pursuant to an initial Form ATS-N. A list of NMS stock ATSs,
including access to initial Form ATS-N filings that are effective,
can be found at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
---------------------------------------------------------------------------
Since the adoption of Regulation NMS in 2005, the market for
trading services has become more fragmented. The number of exchanges
increased from eight in 2005 to 16 exchanges operating today.\894\
Additionally, the market shares of individual exchanges became less
concentrated, with a shift in market shares from some of the bigger and
older exchanges to the newer ones.\895\ For instance, from 2005 to
2013, there was a decline in the market share of trading volume for
exchange-listed stocks on NYSE.\896\ At the same time, there was an
increase in the market share of newer national securities exchanges
such as NYSE Arca, Cboe BYX, and Cboe BZX.\897\
---------------------------------------------------------------------------
\894\ See supra note 660.
\895\ See Letter to Brent J. Fields, Secretary, Commission, from
Edward T. Tilly, Chairman and Chief Executive Officer, Cboe (May 25,
2018), at note 9.
\896\ See Securities Exchange Act Release No. 76474 (Nov. 18,
2015), 80 FR 80998, 81112 (Dec. 28, 2015) (Regulation of NMS Stock
Alternative Trading Systems Proposing Release).
\897\ Id.
---------------------------------------------------------------------------
During the same time period, the proportion of NMS stocks trading
off-exchange (which includes both internalization and ATS trading)
increased; for example, as of August 2018, NMS stock ATSs alone
comprised approximately 14 percent of consolidated volume, and other
off-exchange volume totaled approximately 21 percent of consolidated
volume.\898\ Aside from trading venues, exchange market makers provide
trading services in the securities market. These firms stand ready to
buy and sell a security ``on a regular and continuous basis at a
publicly quoted price.'' \899\ Exchange market makers quote both buy
and sell prices in a security held in inventory, for their own account,
for the business purpose of generating a profit from trading with a
spread between the sell and buy prices. Off-exchange market makers also
stand ready to buy and sell out of their own inventory, but they do not
quote buy and sell prices.\900\
---------------------------------------------------------------------------
\898\ See Securities Exchange Act Release No. 84875 (Dec. 19,
2018), 84 FR 5202, 5255 (Feb. 20, 2019) (Transaction Fee Pilot for
NMS Stocks).
\899\ See Commission, Fast Answers: Market Maker (modified Mar.
17, 2000), available at http://www.sec.gov/answers/mktmaker.html.
\900\ See Laura Tuttle, OTC Trading: Description of Non-ATS OTC
Trading in National Market System Stocks, Commission (Mar. 2014),
available at http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
---------------------------------------------------------------------------
All of these developments increased the competitiveness of the
market for trading services in NMS stocks. However, the Commission
recognizes that while the market is more competitive, the actual level
of competition that any given trading venue faces may depend on
multiple factors including the liquidity of a stock as well as the type
of trading venue and market participant engaging in the trade.
(e) Broker-Dealers' Competitive Strategies for Trading Services
While many market participants use market data to make investment
decisions, not all market participants are equally competitive in their
use of real-time data. The Commission understands that while some
investors (including retail investors) may use a broker-dealer to
execute a trade on their behalf, others, such as the broker-dealers
themselves and other latency sensitive traders, utilize sophisticated
routing tools to strategically decide how to fill an order on an
exchange, including when and where to submit the order, how to split a
larger order (i.e., into how many pieces, or ``child orders'' \901\),
how large the child order sizes should be, and what order type(s)
should be used, e.g., whether to use a market order, limit order, or
some other order type. The strategies employed by broker-dealers and
other latency sensitive traders in this regard are designed to secure
the best possible execution price(s) for an order. For example, the
Commission understands that methodologies utilized in trading orders
can impact the price of the stock being purchased or sold in a manner
that can increase or decrease its execution cost.
---------------------------------------------------------------------------
\901\ Child order refers to a smaller order that was a piece of
a larger ``parent'' order.
---------------------------------------------------------------------------
The Commission understands that broker-dealers in particular
compete with each other to provide the lowest possible execution costs
for their clients (i.e., high execution quality) as quickly as
possible.
An example of routing tools as noted above is smart order routing
(``SOR''). SORs employ the use of algorithms (e.g., by broker-dealers
on behalf of a client) designed to optimally send parts of an order
(child orders) to various market centers (e.g., exchange and ATSs) so
as to optimally access market liquidity while minimizing execution
costs. SORs help to determine how to quickly access (``take'')
available market liquidity before other market participants, and help
to determine how to strategically place limit orders to optimize queue
priority across various limit order books among exchanges. The ability
to optimize queue priority facilitates the ability for a broker to
``capture the quoted'' spread, i.e., buy on the bid or sell on the
offer, while also potentially benefitting from exchange rebates paid to
liquidity providers.
The Commission understands that data beyond the NBBO with minimal
latency are important inputs to strategies designed to optimize the
ability to access market liquidity and minimize execution costs.
Further, the Commission understands that competing with the most
effective SORs is more difficult without possessing real-time market
data while minimizing data latency.\902\ The Commission understands
that those traders who do not access trading tools that utilize
comprehensive market data with low latency experience higher execution
costs on average.
---------------------------------------------------------------------------
\902\ The Commission preliminarily believes that there is also a
significant personnel and technological cost to producing a
sophisticated, competitive smart order router.
---------------------------------------------------------------------------
4. Request for Comments on Baseline
The Commission requests comments on its baseline analysis. In
particular, the Commission solicits comment on the following:
161. Do you agree with the Commission's assessment of the market
failures and the need for regulation to solve market data problems? Why
or why not? Do additional market failures exist that are not described
in this release? If so, what are they? Please explain in detail.
[[Page 16821]]
162. Do you agree that some market participants are unable to rely
solely on SIP data to trade competitively in today's markets? Why or
why not? Please explain in detail. If so, what businesses rely on the
purchase of proprietary market data? The Commission is also seeking
information on the number, type and sizes of market participants that
purchase proprietary market data products either directly from
exchanges for self-aggregation or through market data aggregators. The
Commission requests that commenters provide such information where
available.
163. Do you agree that exchanges are disincentivized from making
improvements to the content or latency of SIP data? Why or why not?
Please explain in detail.
164. Does the Economic Analysis contain all relevant baseline
information? If not, what else should the baseline contain? Please
explain in detail.
165. How competitive is the selection process for the exclusive
SIPs? How does the selection process affect the performance of the SIP?
How does past performance factor into the selection process? Please
explain in detail.
166. The Commission is seeking information on the number of market
participants that rely solely on SIP data for their trading needs, and,
separately, on the number of market participants that do not rely
solely on SIP data for their trading needs. The Commission requests
that commenters provide such information where available.
167. The Commission is seeking information on the consequences
(both positive and negative) of the limited amount of odd-lot quotation
information currently included in SIP data. Please be specific about
exact odd-lot quotation information that results in these consequences
and provide data analysis where possible. Do the consequences vary
across stocks and/or exchanges? Please explain and provide data
analysis where possible.
168. The Commission is seeking information on the consequences
(both positive and negative) of the lack of depth of book information
currently included in SIP data. Please be specific about exact depth of
book information that results in these consequences and provide data
analysis where possible. Do the consequences vary across stocks and/or
exchanges? Please explain and provide data analysis where possible.
169. The Commission is seeking information on the consequences
(both positive and negative) of the lack of auction-related information
currently included in SIP data. Please be specific about exact auction-
related information that results in these consequences and provide data
analysis where possible. Do the consequences vary across stocks and/or
exchanges? Please explain and provide data analysis where possible.
170. The Commission requests comment on the scope and content of
exchange proprietary data feeds. Are the proprietary data offerings
similar across exchanges? Please explain in detail.
171. What are the consequences of the differences in latency
between the SIP and proprietary feeds? Please explain in detail.
172. The Commission requests comment on the comparison of SIP
versus proprietary data access experiences and costs. How do the types
of fees and discount programs compare? Do the exclusive SIPs offer
services that target the same clients as the exchanges do? Please
explain in detail. Do exclusive SIPs offer services that target the
same clients as third-party aggregators? Please explain in detail.
173. The Commission is seeking information on specific revenues and
expenses associated with processing and disseminating market data by
market data aggregators. The Commission requests that commenters
provide such information where available.
174. The Commission is seeking information on pricing of market
data aggregators' data and the breakdown of such product prices between
the direct data fee charged by the exchanges and the fees charged by
market data aggregators for their services. The Commission requests
that commenters provide such information where available.
175. Do you agree with the Commission's competition baseline? Why
or why not? Please explain in detail.
176. Do you agree that the exclusive SIPs have market power? Why or
why not? Please explain in detail.
177. Do you agree with the Commission's assessment of the state of
competition in the market for core and aggregated market data products
in the equities market? Why or why not? Please explain in detail. What
is the magnitude of this market? What are the total expenses incurred
by broker-dealers on market data products? What are the total revenues
earned by exchanges on market data products? Who else incurs costs or
earns revenues on market data products?
178. The Commission requests that commenters provide information on
the number of players in the market data aggregator space, and provide
information on how specialized these companies are.
179. To what extent is it necessary for market participants
executing orders in NMS securities to purchase market data from all
SROs? Please explain in detail.
180. How does the market for proprietary data differ from the
market for consolidated data? Please explain in detail.
181. Do you believe that exchanges have significant market power in
the market for proprietary data products? Why or why not? Please
explain in detail.
182. In what situations can top of book data products serve as
substitutes for SIP data in the equities market? In what situations are
top of book data products not viable substitutes for SIP data? Please
explain in detail.
183. Do you agree with the Commission's assessment of the market
for connectivity services? Why or why not? Please explain in detail. Do
you believe that exchanges have significant market power with respect
to connectivity services? Why or why not? Please explain in detail.
What is the magnitude of this market? What are the total expenses
incurred by broker-dealers on connectivity services? What are the total
revenues earned by exchanges on connectivity services? Who else incurs
costs or earns revenues on connectivity services?
184. Do you agree with the Commission's assessment of the market
for trading services? Why or why not? Please explain in detail. How
does market data and connectivity relate to the market for trading
services? Can market power in one market translate into market power in
another? Please explain in detail.
185. Characterizing competitors as producers (an entity that
creates a good or service for trade) or intermediaries (an entity that
facilitates the trading of goods or services produced by others) could
have implications for the competitive landscape. To what extent are
exchanges producers versus intermediaries in market data products and/
or other services (e.g., execution services, connectivity services)?
Please explain in detail.
186. To what extent is market execution on one exchange a
substitute for execution on another exchange? To what extent are they
complements? Please explain in detail.
187. To what extent is market data from one exchange a substitute
for market data from another exchange? To what extent are they
complements? Please explain in detail.
[[Page 16822]]
C. Economic Effects of the Rule
1. Core Data and Consolidated Market Data
The Commission preliminarily believes that the proposed
enhancements to consolidated data, namely expanding core data and the
amendments to the definitions of ``national best bid and offer'' and
``protected bid or protected offer,'' would result in numerous economic
effects. These economic effects derive from codifying the definition of
core data, from expanding the content of the core data, and from
changing the prices that determine the NBBO and the protected quotes.
The proposed change would have the benefit of mitigating the
influence of existing conflicts of interest inherent in the existing
exclusive SIP model.\903\ The proposed change establishes a required
amount of data to be included in proposed consolidated market data, and
thus reduces the divergence between exchanges' proprietary DOB products
and current SIP data.
---------------------------------------------------------------------------
\903\ For a discussion of these conflicts of interest, see supra
Section VI.A.2.
---------------------------------------------------------------------------
(a) Definitions of Consolidated Market Data, Core Data, Administrative
Data, and Regulatory Data
The Commission's proposed definitions of ``consolidated market
data,'' ``core data,'' ``regulatory data,'' ``administrative data,''
and ``exchange-specific program data'' under Regulation NMS would
specify the quotation and transaction information in NMS stocks that
must be collected, consolidated, and disseminated under rules of the
national market system and pursuant to an effective national market
system plan(s). This definition would codify the dissemination of
certain current SIP data elements, and would include some additional
data elements, but would not include some data that the exclusive SIPs
currently disseminate. This section discusses the secondary economic
effects of this proposed expansion to core data that would come from
codifying the inclusion of some current SIP data in ``core data,''
while the next section discusses the economic effects of expanding the
content of core data. These secondary effects are providing flexibility
to the Data Plans for including new data elements, requiring that
regulatory data would continue to be provided in the decentralized
consolidation model, cost to update the national market system plan(s),
and costs to obtain data that is currently in SIP data but not in
proposed consolidated market data elsewhere.
The proposed definitions of ``exchange-specific program data,''
``regulatory data'' and ``administrative data,'' along with the
proposed ability for the Equity Data Plans to add elements to these
proposed definitions, promotes regulatory efficiency by providing
flexibility for consolidated market data to include data elements
beyond those explicitly defined as ``consolidated market data'' in the
proposal. It provides a mechanism for the participants in the national
market system plan(s) to propose to add additional data elements, such
as elements similar to current retail liquidity programs. This would
allow for organic change in consolidated market data that may become
useful due to future market and regulatory developments.
Further, while the underlying data elements of ``regulatory data''
are currently included in disseminated SIP data, the proposed
definition of ``regulatory data'' would help ensure that market
participants continue to have access to this information.
The Commission recognizes that market data plans would incur one-
time initial implementation costs in ensuring the plans are consistent
with the proposed definitions of ``consolidated market data,'' ``core
data,'' ``administrative data,'' ``regulatory data,'' and ``exchange-
specific program data,'' but the plans would not incur significant
ongoing costs as a result of the codification of these five
definitions.\904\ These initial implementation costs would come from
the operating committees needing to draft revisions to their respective
plans that are consistent with the proposed definitions.
---------------------------------------------------------------------------
\904\ Below in Section VI.C.1(b)(iv), the Commission discusses
the costs of including data elements to the proposed definition of
``core data'' that are not currently in SIP data.
---------------------------------------------------------------------------
The Commission preliminarily believes that not including some data
elements that the exclusive SIPs currently transmit \905\ in the
definition of ``consolidated market data'' could have some costs to
those market participants who would want to arrange to get this data
elsewhere. As discussed above, the UTP SIP offers OTCBB quotation and
transaction feeds for unlisted stocks, and the CTA Plan permits the
dissemination of ``concurrent use'' data related to corporate bonds and
indexes.\906\ As proposed, these data elements would not be defined as
consolidated market data or core data elements. However, the proposal
would not preclude the provision of these data elements by the SROs via
proprietary data products to market participants and investors who wish
to receive them.
---------------------------------------------------------------------------
\905\ See supra Section III.B.
\906\ See supra Section III.C.
---------------------------------------------------------------------------
(b) Expanding Core Data Content
As discussed above,\907\ the Commission proposes to define core
data to include certain odd-lot quote information, certain depth of
book data, and information on orders participating in auctions. This
section discusses the economic effects of expanding the core data
content separately for each additional core data element and then
discusses the additional economic effects that may accrue to market
participants from the combined new core data elements, although market
participants may choose not to take in all of the new core data
elements in every instance. The economic effects discussed in this
section depend on the fees for core data charged by the effective
national market system plan(s) for NMS stocks and the competing
consolidators. The fees for new core data are discussed later.\908\
---------------------------------------------------------------------------
\907\ Id.
\908\ See infra Section VI.C.1(b)(iv).
---------------------------------------------------------------------------
(i) Effects of New Round Lot Definition
The Commission proposes to define a round lot according to a tiered
system based on the price of the stock.\909\ This definition would
result in the inclusion of quotes at better prices in core data that
were previously excluded from being reported because they consisted of
too few shares. These new quotes would now become visible to anyone who
subscribes to core data, thereby improving transparency. The Commission
preliminarily believes that the proposed changes to the round lot
definition would create an economic benefit for market participants who
currently rely exclusively on SIP data to obtain market information,
and for market participants who post odd-lot quotes at prices superior
to the NBBO. These market participants would benefit from being able to
see more information on these smaller quotes at better prices before
they send in their orders, which could improve their trading decisions
and order execution quality by providing an opportunity to realize
gains from trade,\910\ as discussed below in this section.\911\ The
proposed change
[[Page 16823]]
could also improve price efficiency. This is because certain odd-lot
information not currently disseminated as part of SIP data would be
made available as part of proposed core data; therefore market
participants who use SIP data who previously did not use the
information contained in odd-lots would be able to incorporate this
information into their trading decisions. These trading decisions are
integral to how market prices are formed. Also, the proposed change
could affect order routing and the share of order flow received by each
exchange, since more traders will be aware of quotes at better prices
that are currently in odd-lots sizes, and these may not be on the same
exchange as the one that has the best 100 share quote.
---------------------------------------------------------------------------
\909\ See supra Section III.C.1(d)(i).
\910\ See supra note 754.
\911\ The proposed round-lot definition may benefit retail
investors even without changes to their decision to submit orders
based on seeing the price-improving quotes. This is because the
proposed round-lot definition would likely cause the NBBO to become
narrower, and this would affect the execution quality provided by
retail wholesalers to retail investors. See infra Section
VI.C.1(c)(i) for additional discussion on this point.
---------------------------------------------------------------------------
The Commission preliminarily believes that changing the round lot
definition to include smaller-size orders would be a significant
benefit for market participants who would have traded with price-
improving odd-lot quotes in certain stocks but do not do so because
they cannot see information on odd-lot quotes.\912\ Under the proposed
rule, some of these quotes at better prices would be reported as the
NBBO in the new core data. This would mean that these traders would be
able to see the quotes,\913\ and make a decision about whether to trade
based on this newly visible, improved price. This may benefit traders
because they would be able to realize the gains from trade that are
available in this situation and are not currently occurring because of
the lack of information. Also, some traders may wish to exchange an
odd-lot quantity of a stock by posting a limit order for an odd-lot
amount. Currently, this order's price is not visible to traders who
rely solely on SIP data, and thus there may be delays in getting this
limit order filled, since such traders would not send market orders in.
Thus, adding smaller-size quotes in core data for certain stocks would
result in a benefit to both the market participants who would submit
the market orders and the market participants who post the odd-lot
quotes they execute against.
---------------------------------------------------------------------------
\912\ Currently, some information about odd-lot quotes ends up
in core data through certain exchanges rolling up odd lot quotes.
But even in this case, the rolled up quote is reported to the
exclusive SIPs at the worst price out of all the odd-lots that were
rolled up to produce the quote, so the full amount of price
improvement available on that exchange is still not visible to
market participants relying solely on exclusive SIPs for market
data.
\913\ The traders able to see these quotes as a result of the
proposed round-lot definition would include retail investors as a
result of the Vendor Display Rule, among others. See supra Section
III.C.1(d)(i).
---------------------------------------------------------------------------
The magnitude of this benefit depends on the amount of additional
trading generated by the inclusion of odd-lot information. In
particular, the Commission preliminarily believes that to the extent
many market participants who rely solely on SIP data and lack
information on odd-lot quotes would have traded frequently against odd-
lot quotes had they known about them, the benefit would be large.
However, if it is uncommon for market participants who would trade
frequently against odd-lot quotes to rely solely on SIP data and to
lack information on odd-lot quotes, then the Commission preliminarily
believes that the associated economic benefit from including odd-lot
quotes in core data would be small. The Commission preliminarily
believes it is not possible to observe this willingness to trade but
for lack of information with existing market data, and invites comments
on this issue.
However, the Commission can quantify the frequency with which the
hypothetical trader discussed above would see better prices under the
new round lot definition in the current market environment. Based on
this quantification, the Commission preliminarily believes that market
participants relying on new core data would see a significant
improvement in quoted spreads within a large percentage of the dollar
volume of stock trading. Specifically, Table 4 shows the percentage of
instances in a sample of MIDAS data that the NBBO provided at the time
by an exclusive SIP \914\ was inferior in price to the price of a round
lot computed according to the new definition in the proposed rule. For
instance, the table shows that for stocks with prices of $1,000 or
greater, the new round lot definition would cause a quote to be
displayed that improved on the current round lot quote 92.2% of the
time. The frequency of this instance of price improvement appears to
increase uniformly through the round lot tiers in the sample, starting
lower at 9.7% for the $50.01-$100 tier. This analysis shows that,
within each round lot tier in which the round lot size would change,
there is a significant number of instances in which the new round lot
definition would improve the quoted spread.
---------------------------------------------------------------------------
\914\ Since the source used for this SIP NBBO is an exclusive
SIP itself, this quote includes quotes the exchanges produce by
aggregating or ``rolling up'' odd-lots to obtain a round lot-sized
quote.
---------------------------------------------------------------------------
The quantity of instances of price improvement as a result of the
new round lot definition depends on the volume of stocks in the tiers
for which the round lot size would change. Table 1 above documents the
number of stocks in each tier. It shows that while most stocks (80.9%)
would remain unaffected by the new round lot definitions, most of the
dollar trading volume, around 68.3%, currently is in stocks that would
have a new round lot definition under the proposed rule. Based on this
analysis, the Commission preliminarily believes that a meaningful
amount of dollar volume is concentrated in stocks that would have
significant changes to the quoted spread displayed under the new round
lot definition.
The amount of price improvement available in the event that any
price improvement is available, is also a relevant consideration when
deciding whether to trade. Table 5 quantifies the average price
improvement offered by the best quote under the new round lot
definition, conditional on the event that price improvement is
available in the first place. The table shows, for example, that the
new round lot definition in the $50.01-$100 tier could yield an 8 basis
point reduction in the spread (conditional on a price improving quote
being available). Since the average quoted half spread is 31 basis
points, this represents a significant reduction in the half spread. In
the case of the $1000+ tier, the difference of 8.8 basis points
represents an even more significant fraction of the 17 basis point
average half spread. Based on this analysis, the Commission
preliminarily believes that the size of price improvement, conditional
on it being available, is also substantial.
[[Page 16824]]
Table 4--Instances of Price Improvement
----------------------------------------------------------------------------------------------------------------
Instances of price improvement (%) \3\
-----------------------------------------------
Round lot tier 1 2 Best bid or
Best bid Best ask best ask
----------------------------------------------------------------------------------------------------------------
1. < = $50...................................................... n/a n/a n/a
2. $50.01-$100.................................................. 5.3 5.0 9.7
3. $100.01-$500................................................. 11.5 11.4 20.6
4. $500.01-$1000................................................ 46.8 50.1 72.8
5. 1000.01+..................................................... 73.5 70.5 92.2
----------------------------------------------------------------------------------------------------------------
\1\ Tier based on the stock's prior calendar month's average closing price on the primary listing exchange in
August 2019.
\2\ Seven stocks were excluded due to trading in round lots different than 100 shares (i.e., 1 or 10 shares:
Symbols BH, BH.A, BRK.A, DIT, MKL, NVR, and SEB).
\3\ Overall frequency of price improving NBBO quotes during September 2019 using the proposed round lot tier
criteria versus the current 100 share round lot criteria (see footnote 4 of Table 5 for more details). An
instance of a price improving quote is calculated from a sample of MIDAS data, which consists of hourly
snapshots from 10:30 a.m. to 3:30 p.m. for each trading day in September 2019. Calculation is based on the
difference between the best bid/best ask calculated under the new round lot tier definition (source: direct
feeds) compared to the NBBO based on the current 100 share round lot criteria (source: SIP).
Table 5--Size of Price Improvement
----------------------------------------------------------------------------------------------------------------
Best bid: Best ask: Average
Average price Average price difference in SIP: Average
Round lot tier 1 2 improvement ($) improvement ($) quoted half quoted percent
\3\ \3\ spread (%) \4\ half spread (%)
----------------------------------------------------------------------------------------------------------------
1. < = $50.......................... n/a n/a n/a n/a
2. $50.01-$100...................... 0.09 0.12 0.080 0.31
3. $100.01-$500..................... 0.15 0.14 0.044 0.14
4. $500.01-$1000.................... 0.79 0.89 0.080 0.22
5. 1000.01+......................... 1.35 1.36 0.088 0.17
----------------------------------------------------------------------------------------------------------------
\1\ Tier based on the stock's prior calendar month's average closing price on the primary listing exchange in
August 2019.
\2\ Seven stocks were excluded due to trading in round lots different than 100 shares (i.e. 1 or 10 shares:
Symbols BH, BH.A, BRK.A, DIT, MKL, NVR, and SEB).
\3\ Overall frequency of price improving NBBO quotes during September 2019 using the proposed round lot tier
criteria versus the current 100 share round lot criteria. Conditional on a the instance of a price improving
quote, stock-day average price improvement is calculated from a sample of MIDAS data, which consists of hourly
snapshots from 10:30 am to 3:30 pm for each trading day in September 2019. Calculation is based on the
difference between the best bid/best ask calculated under the new round lot tier definition (source: direct
feeds) compared to the NBBO based on the current 100 share round lot criteria (source: SIP).
\4\ Conditional on a the instance of a price improving quote (bid or ask), stock-day average difference in
percent quoted half spread is calculated by SIP NBBO quoted percent half spread minus the new percent quoted
half spread under the proposed round lot tier criteria. Quoted half spread is defined by: Quoted half-spread =
QSit = 100 * (Askit-Bidit) / (2*Mit), where M is the midpoint between the best bid and best ask.
The Commission preliminarily believes that the new round-lot
definition would benefit market participants who utilize strategies
related to order routing, provided that they do not already obtain
information on odd-lots from proprietary feeds. For instance, traders
who wish to fill an order at the best possible price, including at
sizes of less than 100 shares, would be better able to do so if the new
round lot sizes are visible to them, e.g., the exchange with the best
100 share quote may not be the exchange with the best 10 share
quote.\915\ The use of this information could improve order execution
quality and facilitate best execution for these traders.\916\ The
Commission preliminarily believes that many of the market participants
who utilize such strategies already have access to full odd-lot
information via proprietary feeds; for these traders the proposal would
not produce a direct benefit.\917\
---------------------------------------------------------------------------
\915\ Battalio, Corwin, and Jennings (2016) examines the
frequency of trading at inferior prices as compared to available
unprotected odd-lot quotes in a sample of 10 high-priced stocks
during one week in 2015. They find that there was an unprotected
odd-lot limit order available at a better price for 2.52% of the
trades that occurred. See Robert Battalio et al, Unrecognized Odd
Lot Liquidity Supply: A Hidden Trading Cost for High Priced Stocks,
12 J. Trading 35 (2016).
\916\ For discussion of order execution quality and the
provision of execution services by broker-dealers, see supra Section
VI.B.3(e).
\917\ The new round-lot definition may benefit those market
participants who already obtain odd-lot information by providing
them with alternatives to proprietary feeds. For discussion of this
effect, see infra Section VI.C.4(a). Also, the Commission
preliminarily understands that some market participants who use
proprietary feeds as their main source of market data also use the
SIP feeds as a backup. For such market participants, the change in
the round lot definition may improve the value of a core data feed
as a backup.
---------------------------------------------------------------------------
Also, the Commission preliminarily believes that there may be
market participants that would start running these order routing
strategies if the data were available to them at prices comparable to
SIP data. These market participants might currently find that the value
of attempting such strategies without information on odd-lots is too
low to justify running the strategies, but they might find that access
to data on such orders through the new round-lot definition would
enable them to run such strategies effectively. To the extent that such
market participants exist, the change to the round-lot definition would
be a benefit to them as well.\918\
---------------------------------------------------------------------------
\918\ For further discussion of new entrants to the competitive
order routing business, see infra Section VI.C.4(b).
---------------------------------------------------------------------------
The Commission preliminarily believes that the new round lot
definition could improve price efficiency. The wider availability of
information about smaller-sized quotes could mean that more market
participants (who currently rely solely on SIP data) would incorporate
the information contained in those quotes into their trading decisions.
This could have the effect of improving the
[[Page 16825]]
efficiency with which this information becomes reflected in
prices.\919\
---------------------------------------------------------------------------
\919\ For additional discussion of the price efficiency point,
see infra Section VI.D.1.
---------------------------------------------------------------------------
The Commission preliminarily believes that the new round lot
definition could cause changes to order flow as market participants
change their trading strategies to take advantage of newly visible
quotes.\920\ This could mean that there would be changes to the share
of order flow each exchange receives as a result of this rule. The
Commission is uncertain about the magnitude and direction of this
effect, and invites comments on the issue.
---------------------------------------------------------------------------
\920\ For example, currently a market participant, relying on
SIP data, may submit an order to the exchange with the exclusive SIP
NBBO and in the process trade at an inferior price to an odd-lot
quote that the market participant was not aware of on another
exchange. If the market participant would have preferred to route to
the price-improving odd-lot quote, and if that quote would count as
a round-lot under the proposal, then under the proposal the market
participant would send the order to the exchange with the smaller,
price improving quote.
---------------------------------------------------------------------------
The Commission preliminarily believes that the use of the previous
calendar month's average closing price on the primary listing exchange
to determine the round lot tier for a given stock balances certain
tradeoffs that should be considered when selecting such a benchmark.
The Commission is balancing a more up-to-date stock price estimate
against the costs imposed on market participants from having to
frequently make updates to systems and practices to account for changes
to a stock's round lot tier. A more recent average (e.g., the past
week's average closing price) may better reflect the stock's current
price level, and thereby lead to the stock being placed in the correct
tier more frequently. However, such a recent estimate may be more
volatile and thus more prone to causing frequent changes to the stock's
status, especially if the stock's price level is close to a round lot
tier cutoff point, which could then require more frequent adjustments
from market participants, including SROs and competing consolidators,
to account for what a stock's round-lot tier is and what the NBBO for
that stock would be given its tier.
(ii) Effects of Addition of Depth of Book Information
The Commission proposes to add certain depth of book information to
the definition of core data, which would result in this information
becoming available to anyone who subscribes to this element of core
data. The Commission preliminarily believes that this information could
be useful in trading, and therefore disseminating this information as
an element of core data could have the effect of causing changes to the
trading strategies of those market participants who currently rely
solely on SIP data. This could potentially lead to these traders being
able to reduce their execution costs and facilitate best execution,
changes in order flow to different exchanges, improvements in price
efficiency of markets, and gains from trade that are not currently
being realized.
The Commission preliminarily believes that adding the depth of book
information as an element of core data would benefit traders who
previously relied exclusively on SIP data and who, as a result of the
proposed rule, would receive information they previously did not get.
Academic research has found evidence that valuable trading information
can be obtained from the full depth of a limit order book.\921\ As
noted above, market participants also believe that depth of book
information is valuable.\922\ Currently, only traders who subscribe to
exchanges' proprietary data feeds can receive this information. As a
result of the proposed amendments, additional depth of book information
would become available to anyone who subscribes to these elements of
core data. The Commission preliminarily believes that market
participants that currently rely solely on SIP data could use the
additional depth of book information to improve trading strategies and
to lower execution costs. To the extent that the advantage of having
this information depends on other traders not having it, this economic
effect would represent a transfer from the current users of depth of
book information to those market participants who would now get access
to, and would be able to utilize, this information. In particular, a
more widespread dissemination of depth of book information may cause
market prices to adjust to this information more rapidly as more people
react to this information. Once market prices settle to a level that
reflects this information, the opportunity to profit from having
additional depth of book information may be lost.
---------------------------------------------------------------------------
\921\ See Lawrence E. Harris and Venkatesh Panchapagesan, The
Information Content of the Limit Order Book: Evidence from NYSE
Specialist Trading Decisions, 8 J. Fin. Mkts. 25 (2005); Jonathan
Brogaard et al., Price Discovery without Trading: Evidence from
Limit Orders, 74 J. Fin. 1621-1658 (2019); Shmuel Baruch, Who
Benefits from an Open Limit-Order Book?, 78 J. Bus 1267 (2005),
available at https://www.jstor.org/stable/10.1086/430860 (presenting
some theoretical results showing that liquidity takers benefit more
from an open limit order book).
\922\ See supra Section III.C.2(c) (describing how market
participants have stated that they believe they need depth of book
information in order to run their businesses).
---------------------------------------------------------------------------
The Commission preliminarily believes that market participants who
utilize strategies related to order routing, order placement, and order
execution, could benefit from the new depth of book information,
provided that currently they do not already obtain this information via
proprietary data feeds. For instance, traders may seek to get priority
in the queue at a particular price level behind the top of book by
posting a limit order. Such a strategy could benefit from being able to
see the depth at these price levels at multiple exchanges in order to
evaluate which exchange's queue would provide the order with the
highest execution priority. To the extent this is the case, the
Commission believes that the traders who previously did not have access
to additional depth of book information would benefit by being able to
better run such strategies. This could improve order execution quality
for these traders.\923\ The Commission preliminarily believes that many
of the market participants who utilize such strategies already have
access to full depth of book information via subscriptions to
proprietary feeds; for these traders the rule would not produce a
direct benefit.\924\ The Commission is unable to quantify the number of
market participants who currently run these types of strategies without
using depth of book information because the Commission does not have
access to information on specific strategies utilized by individual
traders in the market.\925\
---------------------------------------------------------------------------
\923\ For discussion of order execution quality and the
provision of execution services by broker-dealers, see supra Section
VI.B.3(e).
\924\ The inclusion of depth of book information may benefit
those market participants who already use depth of book information
by providing alternatives to proprietary feeds. For discussion of
this effect, see infra Section VI.C.1(b)(iv). Also, the Commission
preliminarily understands that some market participants who use
proprietary feeds as their main source of market data also use the
exclusive SIP feeds as a backup. For such market participants, the
expansion of DOB information may improve the value of a core data
feed as a backup.
\925\ The Commission preliminarily believes that it is possible
that the inclusion of this information in the proposed definition of
core data, along with reductions in the latency differential that
would result from the decentralized consolidation model, could
benefit market participants who do not currently run these
strategies but who would choose to start running them as a result of
the proposed changes. For more discussion on this possibility, see
infra Section VI.C.4(b).
---------------------------------------------------------------------------
Also, the Commission preliminarily believes that there may be
market participants that would start running these order routing
strategies if the data were available to them at core data
[[Page 16826]]
prices. These market participants might currently find that the value
of attempting such strategies without DOB data is too low to justify
them, but that access to additional DOB data through these elements of
new core data would enable them to run such strategies effectively. To
the extent that such market participants exist, the additional DOB data
would be a benefit to them as well.
The revision in trading strategies discussed above could result in
changes to the decisions traders make about where to route their orders
among the various exchanges. Market participants may find that depth of
book information suggests trading opportunities on exchanges to which
they would not have otherwise routed their orders. The Commission is
uncertain about the magnitude of this effect or which exchanges may
gain or lose order flow as a result. The Commission cannot determine
how many market participants may choose to change routing strategies as
a result of the new depth of book information, nor to what extent the
new depth of book information would cause market participants to change
where they route their orders. The Commission invites comments on this
issue.
Also, the Commission preliminarily believes that the more
widespread dissemination of depth of book information could result in
more efficient pricing.\926\ The Commission preliminarily believes that
as more traders take advantage of information contained in the depth of
book data, prices would reflect this information more quickly.
Therefore, more widespread dissemination of depth of book information
has the potential to lead to pricing that better reflects available
information. If many current users of SIP data are capable of utilizing
the information in the new core depth of book data, this effect may be
large, but if only a few choose to make use of the new data or are
capable of utilizing it, then this effect would be small. The size of
this effect depends on the willingness and ability of current market
participants who currently rely solely on SIP data to make use of the
information in the new depth of book data, which is unobservable.
---------------------------------------------------------------------------
\926\ For further discussion of this point, see infra Section
VI.D.1.
---------------------------------------------------------------------------
The Commission preliminarily believes that there may be gains from
trade that would be realized as a result of adding this depth of book
information as an element of core data. The possibility for this
benefit to materialize relies on the extent to which there exist
traders who would be willing to send orders that ``walk the book''
\927\ but currently do not do so because they do not see what is beyond
the top of the book. This situation represents an economic inefficiency
because there are potential gains from trade that are not realized
because of a lack of information. This would presumably be a benefit to
both the trader walking the book and the traders who posted orders
behind the BBO that would be filled as a result of the trade.
---------------------------------------------------------------------------
\927\ See supra note 814.
---------------------------------------------------------------------------
Relatively few orders actually execute at prices outside the
NBBO,\928\ which implies that trading against quotes away from the NBBO
on a single exchange, using a single marketable order, does not occur
frequently. In addition, an analysis of a sample of trading in ten
stocks on the Nasdaq exchange found that an average of 0.65% of market
orders walked through the best displayed price level for these ten
stocks.\929\ Therefore, the Commission preliminarily believes that
there may be limited benefits from additional DOB information in the
particular hypothetical case of traders who currently rely solely on
SIP data for market information and who would submit market orders to
trade against limit orders beyond the top of the book on a single
exchange if the depth of book information were available. However, the
size of the benefit depends on the willingness of traders to walk the
book after receiving the new DOB information, as well as their trading
interest, and this is unobservable in the current market.
---------------------------------------------------------------------------
\928\ See supra note 814.
\929\ See Nikolaus Hautsch and Ruihong Huang, Limit Order Flow,
Market Impact and Optimal Order Sizes: Evidence from NASDAQ
TotalView-ITCH Data, at 10, Table 3 (Aug. 22, 2011), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1914293.
---------------------------------------------------------------------------
(iii) Effects of Addition of Auction Information
The Commission proposes to add ``auction information'' as an
element of core data. This proposal would result in all auction
information currently disseminated by exchanges via proprietary data
feeds being made available to subscribers of these elements of core
data feeds. The Commission preliminarily believes that the addition of
auction information as an element of core data would make this
information more readily available to anyone who subscribes to these
elements of core data and would have effects that include changes to
market participants' trading strategies, gains from trade as a result
of new participation in auctions, potential improvements to price
discovery in auctions, changes to order routing decisions, and a
significant reduction in the value of dedicated proprietary auction
feeds.
As discussed above, some auction information is currently available
to market participants through specialized feeds for a lower price than
full DOB feeds,\930\ and also a limited set of auction information is
available through the current SIP feeds.\931\ This enables access to a
limited set of auction information for some market participants, at
lower prices than full DOB feeds. To the extent that any market
participants find these auction feeds sufficient for their trading
needs, the Commission preliminarily believes that the addition of all
auction information as an element of core data will have a limited
effect on these market participants. To the extent that these market
participants make up a large share of the market participants who would
be interested in using additional auction information, the Commission
preliminarily believes that the effect of adding auction information
may be limited.\932\ The Commission preliminarily believes that the
extent of this limitation is reduced by the fact that not all auction
information is available to market participants through such feeds. The
Commission does not have data on the number of market participants with
proprietary feed subscriptions.
---------------------------------------------------------------------------
\930\ See supra Section VI.B.2(a).
\931\ See supra Section VI.B.2(a).
\932\ Since the cost to integrate multiple auction feeds into a
single feed is a fixed cost in producing a market data feed, the
Commission preliminarily believes that there would still be a
benefit from the rule in the form of competing consolidator
integrated auction feeds, which could be cheaper for market
participants than integrating the feeds themselves.
---------------------------------------------------------------------------
The Commission preliminarily believes that auction information
contains insights useful to traders in devising and executing trading
strategies.\933\ Therefore, the Commission preliminarily believes that
adding this information as an element of core data would produce a
benefit for those traders who currently do not access such information.
To the extent that these traders can exploit this auction information,
the addition of this information as an element of core data should
enable them to produce better trading strategies and lower execution
costs, as well as facilitate best execution. To the extent that the
advantages of possessing auction information come from exploiting the
[[Page 16827]]
trading decisions of market participants who lack this information,
this effect would represent a transfer from those traders who currently
have auction information to those traders who would obtain access to it
through this rule and are able to exploit it to improve their trading
strategies. The Commission preliminarily believes that this auction
information could potentially be used across all trading venues,
including exchange auctions, continuous exchange trading, and off-
exchange venues.
---------------------------------------------------------------------------
\933\ See supra notes 344-346.
---------------------------------------------------------------------------
The Commission preliminarily believes that there may be potential
gains from trade that would be realized through the addition of auction
information as an element of core data. The Commission believes that
there may be market participants who would trade in auctions but
currently do not trade in auctions because they do not access auction
data. To the extent such traders exist, the addition of auction
information as an element of core data would give them that data. This
trade could benefit both sides of the trade, thus resulting in an
economic benefit.
To the extent that market participants who start trading in
auctions as a result of gaining access to auction information possess
insights beyond what can be inferred from auction information,
increasing the number of participants in auctions as described above
should improve price discovery in the auction process. The Commission
preliminarily believes that those who do not participate in auctions
because they do not access auction information are unlikely to possess
insights beyond what can be inferred from auction information. This is
because any market participant who has such insights would find it
worthwhile to purchase auction information and participate in the
auction so as to exploit the value of the insights. Therefore, this
benefit could be small. The size of this effect depends on the relative
number of traders who possess such insights to those who do not who
start participating in auctions as a result of this rule and the size
of their auction traders in that event, both of which are unobservable
in the current market.
The Commission preliminarily believes that the addition of auction
information as an element of core data may affect the order routing
decisions of market participants who currently do not have access to
auction information. For example, some off-exchange trading venues
cross market-on-close orders before the closing auction takes place and
later settle the trades at the closing auction price. Having access to
auction imbalance information may affect market participants' decision
to route a closing order to either an off-exchange venue or to the
closing auction on the primary listing exchange. For example, a market
participant who gets access to auction information through a
subscription to these elements of new core data might decide not to
route the order to an off-exchange venue so as to be able to
participate in the auction using the new information available. This
auction information could also affect decisions made during the time
when auction information is disseminated about whether to send orders
to continuous trading venues instead of auctions or off-exchange
venues. However, the Commission preliminarily believes that the overall
effect of auction information on order routing decisions is uncertain
and likely would vary based on market conditions.
The Commission preliminarily believes that the value of dedicated
auction feeds would be substantially reduced as a result of the
proposed addition of auction information to core data, and that this
would result in a loss of revenue for those exchanges who offer such
feeds. Since the full set of all auction information currently
available in the market would be included in the definition of core
data proposed by this rule, the Commission preliminarily believes that
the value of any existing data product that provides only auction data
\934\ that is not currently in the exclusive SIP feeds would be
substantially reduced. The Commission expects that many market
participants who are executing a trade, either for themselves or for a
client, have, and would continue to have, a subscription to core data.
Therefore, when this subscription includes all available auction
information, the value of dedicated proprietary auction data feeds
could be substantially reduced.
---------------------------------------------------------------------------
\934\ See supra note 335.
---------------------------------------------------------------------------
(iv) General Costs To Expanding Consolidated Data
The Commission preliminarily believes that there are three
potential costs to adding the new core data elements proposed in this
rule, which are common across all these elements. The first potential
cost is the cost to the new competing consolidators that would be
necessary to implement or upgrade existing infrastructure and software
in order to handle the dissemination of the additional core data
message traffic. The second cost is the technological investments
market participants might have to make in order to receive the new core
data message traffic. The third cost is the cost to users of certain
kinds of trading strategies that may currently be relying on the fact
that this data is not widely distributed today.
The Commission preliminarily believes that the cost for firms that
wish to become competing consolidators to implement or upgrade
infrastructure to handle the dissemination of new round lot quotes,
depth of book information, and auction information would be limited. As
discussed in more detail below,\935\ the Commission preliminarily
believes that the new competing consolidators will likely be firms that
already have the technological infrastructure necessary to process full
depth of book data and to generate the NBBO using this data. Therefore,
for these firms, requiring the competing consolidators to be able to
process the new message traffic resulting from the additional core data
may add only a minimal cost to becoming a competing consolidator.
However, for a firm that does not currently subscribe to, or process
data from, exchange proprietary feeds, the new core data message volume
would increase the cost of becoming a competing consolidator beyond
what it would have cost if the rule did not propose to expand core
data. In particular, if the existing exclusive SIPs should decide to
enter the competing consolidator business, they may incur such costs as
they do not currently disseminate full depth of book data.\936\
---------------------------------------------------------------------------
\935\ See infra Section VI.C.2(a) for a discussion of the
technological capabilities of firms the Commission preliminarily
believes are most likely to become competing consolidators. It is
possible that the addition of this proposed definition of core data
would make consolidation more difficult for core data than it is
currently, and that this added difficulty would result in additional
latency. However, the Commission preliminarily believes that the
risk of this is minimal, again because of the technological
capabilities of competing consolidators and the market forces that
will be in effect in the decentralized consolidation model.
\936\ These costs are included in the discussion of costs for
current exclusive SIPs to provide competing consolidator services.
See infra Section VI.C.2(d).
---------------------------------------------------------------------------
The Commission preliminarily believes that there would be limited
infrastructure investment required on the part of SROs to provide the
information necessary to process and disseminate new core data. This is
because the SROs currently provide all elements of new core data over
their proprietary feed infrastructure.\937\ In addition, the Commission
preliminarily believes that many competing consolidators would be firms
that already subscribe to these feeds,\938\ and
[[Page 16828]]
thus, the SROs would likely not have a large amount of new data
connections to service and therefore would not need to invest in
infrastructure to handle them. However, exchanges, particularly primary
markets, may incur some infrastructure costs related to the
dissemination of new regulatory data.\939\ Currently, the new
regulatory data component to the proposed consolidated market data is
distributed through the SIPs. In order for this information to be
distributed through the new decentralized consolidation model, the rule
requires the exchanges to provide a feed to competing consolidators and
self-aggregators that contains the regulatory data. The Commission
preliminarily believes that the infrastructure and operational
processes provide such a feed is currently not completely in place and
would require investment on the part of exchanges.\940\
---------------------------------------------------------------------------
\937\ See supra Section VI.B.2(a).
\938\ See infra Section VI.C.2(a).
\939\ As discussed above, this new regulatory data would consist
of all the same messages as current regulatory data distributed
through the exclusive SIPs. See supra Section III.D.
\940\ The costs to SROs to produce a feed for such regulatory
data is included in the numbers for the general costs to SROs for
providing the data necessary to generate consolidated market data in
Section V.D.6.
---------------------------------------------------------------------------
The Commission preliminarily believes that the costs for
infrastructure investment on the part of market participants \941\ that
choose to receive the new DOB and auction information components of
core data would have only a limited impact.\942\ Adding these
components to core data could substantially increase the total message
traffic in core data,\943\ and this increase in message traffic may be
accompanied by costs to market participants to set up the
infrastructure required to handle this new level of traffic. However,
the proposed amendments would not require market participants to
receive (or display) the complete set of proposed consolidated market
data, and competing consolidators would not be required to deliver all
proposed consolidated market data for each data product they
offer.\944\ Therefore, those market participants who do not want to
incur the costs associated with the expanded core data message traffic
due to additional depth of book information or auction information
would be able to choose not to receive any such additional information.
Presumably, a market participant would therefore only seek to obtain
the full set of consolidated market data if it believed that the
benefits of receiving the data justified the costs. Thus, the
Commission preliminarily believes that no market participant who does
not consider this cost of the infrastructure investments necessary to
receive the new core data worthwhile would have to incur it. For those
market participants who do wish to incur the cost, the Commission is
unable to estimate the associated costs because it does not have access
to information about the infrastructure expenses a market participant
incurs to process market data and because of the likelihood that such
costs depend on each market participant's existing infrastructure.
---------------------------------------------------------------------------
\941\ These market participants would include any entity that
subscribes to the new consolidated market data.
\942\ See also supra Section VI.C.1(b)(i).
\943\ The Commission preliminarily believes that the addition of
DOB information, in particular, may substantially increase message
traffic. See supra note 294.
\944\ A market participant that has obligations under Rule
603(c) would have to receive all data necessary to generate
consolidated market data to comply with the rule. The specific cost
associated with some of this data is discussed below. See infra
Section VI.C.1(c)(i).
---------------------------------------------------------------------------
The Commission preliminarily believes that adding the depth of book
and auction information to core data could impose a cost on traders who
rely on strategies that take advantage of the fact that the information
in depth of book and auction data is not widely distributed (i.e.,
those traders who are beneficiaries of existing informational
asymmetries). To the extent that some of the value of depth of book and
auction information lies in the fact that they currently are not
observed by a number of market participants, the Commission
preliminarily believes that the dissemination of this data would
adversely impact the profitability of such trading strategies. For
traders using trading strategies based on depth of book information,
the magnitude of the cost caused by the proposed amendments would
depend on the extent to which the five aggregated levels of depth
proposed in this rule approximate the information contained in the full
depth of book information. To the extent that these strategies exploit
the lack of information on the part of exclusive SIP-reliant traders,
this cost would represent a partial transfer to traders who currently
rely solely on SIP data. The Commission is unable to estimate the size
of this effect, since it does not have a method for detecting the use
of such trading strategies from market data or determining what the
profit on such strategies would be if they could be detected. The
Commission invites comments on the issue.
Regarding the proposed amendment to change the round lot
definition, the Commission preliminarily believes that the proposed
amendment may negatively affect certain trading strategies, but the
associated costs are likely to be small. First, the Commission
preliminarily believes that there may be traders who currently attempt
not to display their orders to wide public view by posting them in odd-
lot sizes, in pursuit of trading strategies that take advantage of a
market's limited knowledge of odd-lot size quotes. The Commission
understands that certain traders (ones who are the most likely to
recognize any advantage being sought in this manner) obtain proprietary
feeds and so currently can see these odd-lot quotes. This means that
this strategy cannot be used to hide quotes from users of proprietary
feeds. To the extent that it is necessary to hide the quotes from such
users in order for the strategy to work, the benefits of such a trading
strategy are likely to be minimal. If this is the case, then to the
extent that the new round lot definition makes this strategy more
difficult, the Commission preliminarily believes that the cost to these
traders of losing such an opportunity would also be minimal. On the
other hand, if there is some benefit to posting quotes in odd-lot sizes
to hide them from view (or at least from the view of exclusive SIP
users) despite the fact that users of proprietary feeds can still see
the quotes, the Commission preliminarily believes that to the extent
that the new round lot definition makes this strategy more difficult,
there could be a cost to the traders who use such a strategy. The
Commission cannot observe whether an odd-lot quote is being used to
hide the order or not but invites comments on the issue.
Second, there may be costs to those traders who currently enjoy the
position of being among the traders who can see odd-lot quotes via
proprietary data feeds. The Commission preliminarily believes that odd-
lot quotes are more easily taken advantage of by those traders who can
see the quotes. Currently, this advantage is available only to those
traders who purchase proprietary data feeds. The Commission
preliminarily believes that this gives these traders an advantage over
other traders by improving their order execution costs. Under the
proposed changes to core data, this advantage is likely to be reduced.
If this were to happen, it would be because other traders would obtain
the advantage as well and may take advantage of these quotes before the
current direct feed subscribers do. To the extent that this happens,
this cost to current direct feed subscribers from losing this advantage
represents a transfer to the traders who can see the liquidity
currently in odd-lots. The Commission is uncertain about
[[Page 16829]]
the size of the loss in advantageous trading opportunities to traders
who subscribe to the proprietary data. To quantify this requires
knowing (among other things) when an odd-lot quote is traded with by a
participant who had access to full odd-lot information and when it was
traded with by a participant who did not know the quote was there, and
this is not observable from available market data. However, the
Commission invites comments on the issue.
(v) Request for Comments
The Commission requests comments on its analysis of the economic
effects the proposed amendments regarding core data and consolidated
market data. In particular, the Commission solicits comment on the
following:
188. Do you agree with the Commission's analysis of the economic
effects of creating definitions for ``consolidated market data,''
``core data,'' ``administrative data,'' and ``regulatory data''? Why or
why not? Please explain in detail.
189. Do you agree with the Commission's analysis of the economic
effects of expanding the content of core data? Why or why not? Please
explain in detail.
190. To what extent would the expansion of core data reduce the
value of current market data products? What would be the economic
effect of any reduction? Who would benefit and who would incur costs of
any value reduction? Would the reduced value result in a net welfare
gain or loss? Please explain in detail and quantify if possible.
191. To what extent would market participants who wish to receive
information currently contained in the exclusive SIP feeds that will
not be included in the proposed definition of consolidated market data
be able to obtain this information from other sources? What would be
the likely price of such sources?
192. The Commission requests comments on the potential uses of
expanded core data content. How would market participants use the
expanded core data? Which market participants would be likely to use
the additional depth of book data? To what extent would the users or
uses differ from current users and uses? What would be the potential
economic effects of the expanded core data? Please be specific.
193. The Commission requests comment on the capacity requirements
needed by exchanges, competing consolidators, and users resulting from
expanded core data. Would any of these participant types need to
upgrade systems to be able to handle the expanded data? If so, what
would be the aggregate one-time and ongoing expenses of these upgrades?
Would such expenses vary by type of entity or other factors? If so,
what factors might affect these expenses and what would a reasonable
range of expenses be for exchanges, competing consolidators, and users?
Would the expansion of core data increase any data latencies relative
to today? If so, what would be the economic effect of the increased
latency? Please be specific.
194. The Commission requests that commenters provide any insights
they may have as to the effect of the addition of depth of book
information, smaller quotes (from the definition of round lot), and the
inclusion of auction information on the share of order flow received by
various exchanges, ATSs, and other trading systems. If you expect the
inclusion of such information to alter order routing decisions, please
explain the factors that could determine the winners and losers and
whether such changes would result in net welfare gains or losses.
Please provide estimates of these potential effects.
195. The Commission requests that commenters provide any insights
they may have as to the effect of adding the depth of book, smaller
quotes, and auction information to the core data on traders who
currently benefit from information asymmetries. Would any losses to
these traders be offset by gains to others? If so, would there be net
welfare gains or losses? Please explain in detail and also submit any
insights you may have as to the size this effect.
196. The Commission requests that commenters provide any insights
they may have as to the effect of the proposed round lot definition on
the informational advantage currently possessed by those traders who
obtain odd-lot quotes via proprietary feeds. Would any transfers
between those who currently have access to this data and those who do
not result in any welfare gains or losses? What effect would the
proposed round lot definition have on trading strategies that exploit
the hidden nature of odd-lots? Please explain in detail.
197. Do you agree with the Commission's assessment that the traders
currently reliant on SIP data, who will be able to see price-improving
odd-lot quotes in certain stocks, could create additional trades that
do not currently take place? Why or why not? Please explain in detail.
198. The Commission requests that commenters provide any insights
they may have as to the effect of including depth of book information
in core data on trading strategies that exploit the information in
current depth of book data products.
199. The Commission requests that commenters provide any insights
they may have as to the effect of including depth of book information
in core data on the informational advantage currently possessed by
those traders who obtain depth of book via proprietary feeds. Would any
transfers between those who currently have access to this data and
those who do not result in any welfare gains or losses? Please explain
in detail.
200. The Commission requests that commenters provide any insights
they may have as to the use of depth of book information in running
strategies that attempt to establish priority in the queue at a
particular price level behind the top of book. Are such strategies ever
run without access to depth of book information? How common are such
strategies in the market?
201. Would the inclusion of depth of book information in core data
strain current throughput, processing, or storage capacities? If so, by
how much? How costly would it be and who would incur the costs of
upgrading capacity to handle depth of book information in core data?
202. Do you agree that the inclusion of odd-lot or depth of book
information in core data would result in more efficient pricing? Why or
why not? Please explain in detail.
203. To what extent would any benefits of including depth of book
information in core data depend on the degree to which orders ``walk
the book''? Which benefits, if any, depend on this? Please explain how.
204. To what extent would adding all auction information to core
data result in such information being more widely disseminated, and
what role do existing dedicated auction feeds play in this? If so, how
would market participants use this more widely disseminated data and
what would be the economic effect of this usage? Please explain in
detail.
205. Would disseminating auction information in core data increase
participation in auctions? Why or why not? What would be the economic
effect of any change in auction participation? Would this change in
auction participation improve price discovery? Please explain.
206. What are the initial and ongoing technology costs that
competing consolidators would incur to collect, compile, process, and
disseminate the expanded core data? How would these costs vary across
potential competing consolidators--current exclusive SIPs, current
market data aggregators and self-aggregators, and new entrants? Would
[[Page 16830]]
these costs constitute a significant barrier to entry to becoming a
competing consolidator? Why or why not? Please explain and provide
quantified costs.
207. What are the initial and ongoing technology costs that
exchanges would incur to disseminate the expanded core data to
competing consolidators? Please quantify these costs. Do commenters
agree that these costs would be minimal to the extent that exchanges
are already disseminating such information in proprietary data feeds?
Why or why not? Please explain.
208. What would be the initial and ongoing technology expenses
incurred by market participants to receive and process the expanded
core data for their intended uses? Please quantify these expenses. Do
you agree that such technology expenses would be minimal for those
market participants that currently receive and process such information
from proprietary data feeds? Why or why not? Do you agree that such
technology expenses would be mitigated by the fact that only those
market participants that would significantly benefit from receiving and
using such data would choose to receive it? Why or why not? Please
explain in detail.
209. Do you agree with the Commission's range of the potential
increase in message traffic associated with the expansion of market
data? Please explain and provide alternate estimates as necessary. How
would the costs incurred by exchanges, competing consolidators, and
data users depend on the increase in message traffic? Would the
relation between message traffic and costs for each of these entities
be linear, concave, or something else?
(c) Amendments to the NBBO and Protected Quotes and Other Conforming
Changes
The proposal to change the round lot size for stocks with prices
greater than $50 would mechanically change NBBO spreads for these
stocks, as explained below. Specifically, almost all stocks with prices
above $50 would experience narrower NBBO spreads. In addition to the
direct effect of narrower quoted spreads, the Commission recognizes
that these mechanical changes to the NBBO may affect other Commission
or SRO rules and regulations. For some of these rules and regulations,
the Commission is proposing conforming changes, which themselves can
have economic effects. For other rules and regulations, the Commission
analyzes below the follow-on economic effects of the mechanical changes
to the NBBO.
(i) Changes in the National Best Bid and Offer and Protected Quotes
As discussed in detail above,\945\ the proposed amendments would
reduce the number of shares included in the definition of a round lot
for NMS stocks for which the prior calendar month's average closing
price on the primary listing exchange was greater than $50.00.\946\
Higher priced stocks would be grouped into tiers based on their price
and stocks in higher price tiers would have fewer shares in their
definition of a round lot. In addition, the proposed amendments would,
as part of the proposed definition of core data, require that the best
bid and offer and national best bid and offer include odd-lots that,
when aggregated, are equal to or greater than a round lot and that such
aggregation shall occur across multiple prices and shall be
disseminated at the least aggressive price of all such aggregated odd-
lots.\947\
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\945\ See supra Section III.C.1(d).
\946\ The round lot size for the twelve stocks that currently
have round lot sizes less than 100 shares could also change as a
result of the proposed amendments. For some of these stocks, the
round lot size may increase, which could cause the quoted spread
derived from the NBBO to widen. See supra Section III.C.1.
\947\ See supra Section III.C.1. Several exchanges already
aggregate odd-lot orders into round lots and report such aggregated
odd-lot orders as quotation information to the exclusive SIPs. See
supra notes 157-158 and accompanying text.
---------------------------------------------------------------------------
The Commission preliminarily believes that these amendments could
potentially change the spread between national best bid and offer for
these higher priced stocks because the NBBO would now be calculated
based off of the smaller round lot size. To the extent that odd-lot
shares exist in these stocks at prices that are better than the
national best bid and offer (i.e., at prices higher than the national
best bid and prices lower than the national best offer), the new
national best bid and offer under the proposed amendments may be at a
higher/lower price because fewer odd-lot shares would need to be
aggregated together (possibly across multiple price levels) to form a
round lot. This could result in a quoted spread that is calculated
based off of the NBBO being smaller for these stocks. The Commission
preliminarily believes that the reduction in spreads would be greater
in higher priced stocks because stocks in higher priced tiers would
have fewer shares included in the definition of a round lot.\948\
---------------------------------------------------------------------------
\948\ See supra Section III.C.1. Also, for additional analysis
of the narrowing of spreads as a result of the new round lot
definition, see supra VI.C.1(b)(i).
---------------------------------------------------------------------------
The proposed amendments would also change the definition of a
protected quote from a round lot to 100 shares.\949\ This would
increase the number of shares required for a quote to be protected for
the twelve stocks that currently have round lot sizes of less than 100
shares.\950\ Additionally, the proposed amendments would only allow
odd-lot orders at a single price point to be aggregated together to
form a protected quote.\951\ As discussed above, several exchanges
already aggregate odd-lot orders across different price levels into
round lots and report such aggregated odd-lot orders as protected
quotes to the exclusive SIPs.\952\ To the extent that a stock currently
has odd-lot shares inside the NBBO, the Commission preliminarily
believes the proposed amendments could cause the protected quotes to
widen because odd-lot shares at multiple price levels could no longer
be aggregated together to create a protected quote.\953\ Additionally,
if stocks have periods of time when they do not have 100 aggregated
shares at the same price point, then under the proposed amendments,
they could have increased periods of time during which they might not
have a protected quote. The Commission cannot quantify to what extent
protected quotes would widen because the effects would partially depend
on how market participants adjust their order submissions based on the
new round lot size, which the Commission is unable to predict. However,
the Commission preliminarily believes that these effects would vary
based on the price of the stock. For stocks with prices in the lowest
proposed round lot tier, i.e. stocks with prices of $50.00 or less, the
Commission preliminarily believes that the effects would be minimal
because the round lot size would not change for these stocks and
because there is evidence that these stocks have fewer odd lots inside
the current NBBO.\954\ The Commission preliminarily believes that the
effect on protected quotes would be greater for stocks with higher
prices. Since higher priced stocks appear to have more odd lots inside
the current NBBO,\955\ the Commission preliminarily believes that under
the proposed amendments their protected quotes could widen. The
[[Page 16831]]
Commission preliminarily believes that both the amount by which, and
the proportion of time, the protected quote would be wider under the
proposed amendments would increase with the price of the stock.\956\
The Commission invites comments and analysis in order to estimate to
what extent the protected quotes would widen under the proposed
amendments.
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\949\ See supra Section III.C.1(d)(i).
\950\ See supra notes 141, 251.
\951\ See supra Section III.C.1.
\952\ See supra note 85 and accompanying text.
\953\ Although such a widening of the protected quote could
impact execution quality of orders, the Commission preliminarily
believes that best execution obligations of broker-dealers may
mitigate this result.
\954\ See supra Section III.C.1(b) (discussing staff odd-lot
analysis).
\955\ Id.
\956\ The Commission preliminarily believes that under the
proposed amendments some high priced stocks that currently have
round lot sizes of less than 100 shares may not have a protected
quote in place for much of the trading day because they might have
price levels with size greater than or equal to 100 shares.
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The Commission preliminarily believes that the change in the round
lot and protected quote definition could have an effect on retail order
flow internalization businesses. Currently, some wholesalers,\957\ by
arranging to execute orders on behalf of retail broker-dealers, offer
superior prices relative to the existing NBBO (i.e., price improvement)
to retail investors. As part of this arrangement, the wholesaler
typically agrees that some percentage of the broker-dealer's orders
will execute at prices better than the NBBO and/or agrees to certain
execution quality metrics. The Commission expects that the new
definition of a round lot will, at times, make the NBBO narrower for
the affected stocks because the new definition would include orders
that are at superior prices to the 100 share NBBO at a size less than
100 shares. As a result, it may become more difficult for the retail
execution business of wholesalers to provide price improvement and
execution quality metrics at levels similar to those provided under the
100 share round lot definition today.
---------------------------------------------------------------------------
\957\ See supra note 892 for discussion of wholesalers and
retail internalization.
---------------------------------------------------------------------------
It is also possible that by the same mechanism retail investors
could experience an improvement in execution quality from these
wholesalers.\958\ Assuming that the NBBO has narrowed, and wholesalers
continue to agree to provide a certain level of price improvement off
of the narrower spread, this would lead to better execution prices for
retail investors. To the extent that retail wholesalers are held to
similar execution quality standards by retail broker-dealers in a
narrower spread environment, this could have a negative effect on the
profitability of the retail execution business for wholesalers, given
that there would be less ``spread profit'' available to the wholesaler
in a narrow spread environment. This is, in part, because the
wholesaler may often keep a portion of the spread profit that is not
given as price improvement to the investor who submitted the order.
Therefore, if the NBBO has narrowed and price improvement must still be
provided, there would be less revenue for the wholesaler.\959\ To the
extent this happens, it would be a transfer from the wholesaler to
retail investors.
---------------------------------------------------------------------------
\958\ This improvement may not be transparent to the retail
investor. See infra note 976 for further discussion of this point.
\959\ The NBBO based off of the new round-lot definition would
be relevant to the spread considered by the wholesalers because,
among other things, it would be used for Rule 605 execution
statistics. See infra Section VI.C.1(c)(iii) for further discussion
of Rule 605 statistics.
---------------------------------------------------------------------------
To make up for lower revenue per order filled in a narrower spread
environment, wholesalers could respond by changing how they conduct
their business in a way that could affect retail broker-dealers. There
are several possibilities, including but not limited to, reducing per
order costs associated with their internalization programs, such as
reducing any payments for order flow or reducing the agreed upon
metrics for price improvement. In the event that wholesalers reduce
payments for order flow, retail broker-dealers could respond by
changing certain aspects of their business. The Commission is uncertain
as to how wholesalers may respond to this proposal, and, in turn, how
retail broker-dealers may respond to those changes, and the Commission
is uncertain as to the extent of these effects.
The effect of lost revenue for wholesalers discussed above may be
reduced if wholesalers use proprietary feeds to trade, to the extent
they already see and respond to odd-lot quotations inside the NBBO and
currently provide execution quality to customers based upon the
superior odd-lot quotations.
The Commission preliminarily believes that the change in the NBBO
and the protected quote caused by this proposal could change the share
of order flow captured by each exchange. Currently, Rule 611 requires
that the trading center on which the order is executed prevent
executions that result in trade-throughs of protected quotes,\960\ and
exchange rules provide for the aggregation or ``rolling up'' of odd-
lots of different prices to produce protected quotes.\961\ With the
NBBO based off of the new round lot definition, the protected quote
remaining at 100 share quotes, and a change in the ``roll up'' practice
for odd-lot quotes, the Commission preliminarily believes that there
would be changes in how orders are routed to fulfill both best
execution requirements and protected quote requirements. These changes
might not be uniform across exchanges, and it is possible that some
exchanges would see an increase in order flow. This particular effect
would represent a transfer of business (and therefore transaction fees)
between the exchanges.
---------------------------------------------------------------------------
\960\ See supra notes 234-235.
\961\ See supra note 157.
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Also, the Commission preliminarily believes that changes in the
NBBO caused by the new round lot and protected quote definitions could
also affect other trading venues, including exchanges and ATSs.\962\
Exchanges and ATSs have a number of order types that are based off of
the national best bid and offer.\963\ Changes in the NBBO could affect
how these order types perform and could also affect other orders they
interact with. Some ATS matching engines also derive their execution
prices based off of price improvement measured against the NBBO.
Changes in the definition of the NBBO could affect execution prices on
these platforms. Overall, the Commission preliminarily believes that
these interactions could affect order execution quality on different
trading platforms, but it is uncertain of the direction or magnitude of
these effects.
---------------------------------------------------------------------------
\962\ See supra Section VI.C.1(c)(iii) for additional discussion
of effects on exchange rules.
\963\ For example, the apparent price improvement over the NBBO
calculated off of core data that is offered by a midpoint crossing
network would be reduced as a result of these changes to the NBBO.
---------------------------------------------------------------------------
Changes in execution quality could in turn affect competition for
order flow between different trading venues, with trading venues that
experience an improvement/decline in execution quality attracting/
losing order flow. However, the Commission is uncertain of the
direction or magnitude of these effects.
The Commission preliminarily believes that market participants who
currently rely solely on core data to obtain NBBO feeds would incur
some infrastructure investment costs as a result of the proposed
amendment to change the definition of a round lot. This is based on the
Commission's belief that the proposed amendment would lead to more
frequent updates to the NBBO and that this would result in an increase
in message traffic for NBBO feeds.\964\ The Commission acknowledges
that having an NBBO feed is an essential component of the broker-dealer
business. The Commission is unable to estimate the associated costs
because it does not have access to
[[Page 16832]]
information about the infrastructure expenses a broker-dealer incurs to
process market data and because of the likelihood that such costs vary
substantially according to the existing infrastructure of broker-
dealers, but the Commission invites comments on the issue.
---------------------------------------------------------------------------
\964\ As discussed previously, this will happen more in high-
priced stocks where the new round lot definition will have more of
an effect. See supra Section III.C.1(d)(i).
---------------------------------------------------------------------------
For certain core data use cases, the costs described in the
preceding paragraph are likely to be minimal. Many broker-dealers, when
accessing data for the purposes of visual display, currently obtain
NBBO quotes from the exclusive SIPs with a ``per query'' use case. This
use case is set up so that a quote is only sent when it is asked for.
The Commission preliminarily believes that this setup has very little
technological cost associated with it and that furthermore whatever
cost there is to receiving such a feed would not be impacted by
increasing the number of times the NBBO is updated over a given time
period. Thus, the Commission believes that for those broker-dealers who
rely on per query use cases for their quotes, the upgrade costs
resulting from changing the round lot definition would be minimal.\965\
---------------------------------------------------------------------------
\965\ This conclusion is contingent on the assumption that
competing consolidators would choose to offer a per query service to
market participants so that this arrangement could continue after
the rule takes effect.
---------------------------------------------------------------------------
Trading venues and broker-dealers could also experience
implementation costs from having to modify and reprogram their systems,
including matching engines and SORs, to account for the changes in the
NBBO and protected quotes caused by the proposed amendments. For costs
to trading venues as a result of changes to the protected quotations,
NBBO, and the new restriction on roll up quotes, the Commission does
not have detailed information on the operation of exchange matching
engines. However, the Tick Size Pilot required re-programming of
exchange matching engines as well. For that pilot, CHX estimated that
total costs for implementing the pilot were $140,000 per SRO and market
center.\966\ The Commission preliminarily believes that this number may
provide some sense of the level of cost associated with the changes
SROs, ATSs, and other off-exchange trading venues would have to make in
order to comply with the new rules regarding protected quotes. In
addition, there could be variation in this cost between different
market centers or categories of market centers depending on the
existing state of their infrastructure. The Commission invites comments
on the reasonableness of this number as an approximation for the cost
to update matching engines.
---------------------------------------------------------------------------
\966\ See Letter to Brent J. Fields, Secretary, Commission, from
James G. Ongena, General Counsel, Chicago Stock Exchange, Inc. (Dec.
22, 2014).
---------------------------------------------------------------------------
Broker-dealers may also incur implementation costs. For example, a
broker-dealer who runs an SOR off of core data alone would now have to
adapt this system to keep track of the NBBO separately from the
protected quote. This is particularly relevant for the submission of
Intermarket Sweep Orders (``ISOs''), where the broker-dealer assumes
responsibility for preventing trade-throughs. For ISOs, the broker-
dealer's SOR would now have to simultaneously target liquidity
available at the NBBO while keeping track of protected quotes to
prevent trade-throughs. The Transaction Fee Pilot required re-
programming of SORs as well, and forms a basis for an estimate of these
costs. For that pilot, the Commission estimated that the costs of a
one-time adjustment to the order routing systems of a broker-dealer
would $9,000 per broker-dealer.\967\ The Commission preliminarily
believes that this number may provide some sense of the level of cost
associated with changes that broker-dealers, as well as other entities
making real-time order routing decisions based off of SIP data, would
have to make as a result of the proposed changes to the NBBO and
protected quote and other implementation costs discussed below.\968\
Such costs are likely to vary substantially across broker-dealers
according to the state of their existing infrastructure. The Commission
invites comment on the reasonableness of this number as an
approximation for the costs to update trading systems to deal with this
implementation cost and the implementation costs discussed below.
---------------------------------------------------------------------------
\967\ See Securities Exchange Act Release No. 84875 (Dec. 19,
2018), 84 FR 5202 (Feb. 20, 2019) (Transaction Fee Pilot for NMS
Stocks).
\968\ The Commission preliminarily believes that this $9,000
estimate would cover the changes that would have to be made as a
result of the proposed distinction between the NBBO and the
protected quote as well as changes that would result from the effect
of the proposal on locked or crossed markets. These costs are
discussed below, see infra Section VI.C.1(c)(ii).
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The Commission is also deleting the reference to ``The Nasdaq Stock
Market, Inc.'' from the definition of protected bid or offer and
believes that this changes would have no economic effects. As explained
above in Section III.C.1(d)(ii), Nasdaq is now a national securities
exchange and is thus otherwise bound by the definition.
(ii) Amendments to Locked/Crossed Markets
The Commission preliminarily believes that the proposed amendments
could cause an increase in the frequency of locked and crossed NBBOs in
certain stocks.\969\ This is expected to occur due to the fact that the
existing locked and crossed markets prohibition, as affected by the
proposed amendments, would only apply to protected quotations (or the
PBBO) and not to the new round lot sizes, which may often constitute
the NBBO. As described above in Section III.C.1(d)(ii), Rule 610(d),
which requires trading centers to establish procedures to prevent
orders being entered that would lock or cross markets, is based solely
on protected quotations, which, as proposed to be defined, may not be
the NBBO. If a locked and crossed NBBO is not prohibited by rule, it is
more likely to occur.
---------------------------------------------------------------------------
\969\ Locked and crossed markets already occur with respect to
odd-lot quotes and are observable to market participants who
subscribe to proprietary feeds. See supra note 256 and accompanying
text. Even if there is no increase in the frequency of locked and
crossed markets, their occurrence may still be observed by a higher
number of market participants under the proposed amendments because
of the change in the round lot definition.
---------------------------------------------------------------------------
The Commission preliminarily believes that this increase is
unlikely to have much economic effect. The new round lot definition may
cause the NBBO to narrow. The Commission preliminarily understands that
it can sometimes happen that a market becomes locked or crossed in odd-
lot orders. To the extent that these odd-lots are included in the new
definition of a round lot, the NBBO will appear locked or crossed on
occasion. The Commission preliminarily anticipates that the fact that
they will now be classified as a locked or crossed NBBO will not make
much difference, because these locked or crossed conditions already
occur in odd-lots. Furthermore, the effect of having these locked or
crossed quotes visible to market participants who rely solely on core
data is unlikely to be different from the general effects discussed for
the added information as a result of the change in the round lot
definition. In particular, to the extent that these crosses and locks
in odd-lot sizes represent a profitable trading opportunity to those
market participants who rely solely on exclusive SIPs, being able to
observe the occurrence of these events as a result of the proposed
change to the round-lot definition would be a benefit to these
[[Page 16833]]
market participants.\970\ Also, to the extent that market participants
who currently subscribe to proprietary feeds are able to profit from
being the only market participants to observe crossed or locked odd-
lots, the proposed change will represent a cost to them.\971\ To the
extent that the ability to profit from observing crossed or locked odd-
lot quotes comes from exploiting those market participants who cannot
see the crosses or locks, this change will represent a transfer from
those who currently trade on this information to those who acquire the
information through new core data and are able to use it
effectively.\972\ It is also possible that traders avoid sending orders
because of the risk of being exploited if they cross or lock the
market. To the extent that this happens, and to the extent that the
proposed expansion of core data addresses this concern, the increase in
trading that would result would represent a benefit to both sides of
the trade.\973\
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\970\ See supra Section VI.C.1(b)(i) for further discussion of
such benefits resulting from the new round-lot definition.
\971\ See supra Section VI.C.1(b)(iv) for further discussion of
such costs resulting from the new round-lot definition.
\972\ See supra Sections VI.C.1(b)(i) and VI.C.1(b)(iv) for
further discussion of transfers resulting from the changes to the
round-lot definition.
\973\ See supra Section VI.C.1(b)(i) for further discussion of
such benefits resulting from the new round-lot definition.
---------------------------------------------------------------------------
The Commission preliminarily believes that some crossed or locked
quotes represent traders who are not aware at the time they post their
quote that the quote could be filled by a marketable order elsewhere.
To the extent this happens it represents a cost to this trader since
the posted order is exposed to the risk that it will be executed with a
marketable order at a price inferior to what is available on the market
to the trader who posted the order.
Market participants would also experience implementation costs in
order to modify their systems to account for locked and crossed NBBOs.
The Commission preliminarily believes that to the extent that market
participants currently rely on the exclusive SIPs to keep track of
whether trading restrictions imposed by Rule 610(d) would apply, their
systems would have to be updated to take into account the fact that the
NBBO is no longer the price point at which such restrictions are
triggered. Instead, they would have to keep track of both the NBBO for
trading purposes, and the new protected bid and offer in order to
monitor whether a 610(d) restriction would apply. The costs to make
such changes are covered by the estimate provided above for costs to
implement changes that would result from changes to the NBBO and
protected quote, since that estimate is related to trading system
adjustments.\974\ Such costs are likely to vary substantially across
market participants depending on their existing infrastructure.
---------------------------------------------------------------------------
\974\ See supra note 968 and accompanying text.
---------------------------------------------------------------------------
An increase in the frequency of locked and crossed markets could
also have additional economic effects. As discussed above, it could
cause a change in order routing behavior and order flow between trading
venues. Furthermore, as discussed below, it could also affect the
calculation of Rule 605 execution statistics.
(iii) Other Rules and Regulations
The changes to core data, particularly the changes to the
definition of ``national best bid and national best offer'' affect how
other rules and regulations operate. In particular, this change affects
which orders determine the reference price for numerous rules,
including rules under the Exchange Act, SRO rules, and NMS plans. The
Commission discussed many of these above in Section III.C.1(d)(i).
Specifically, the Commission preliminarily believes that the changes to
the NBBO may present changes to the benchmark prices used in Regulation
SHO, LULD, retail liquidity programs, market maker obligations, and
certain exchange order types and recognizes that the change in the
benchmark price could result in economic effects. Further, changing the
NBBO would alter the estimation mechanics for Rule 605 metrics,
resulting in implementation costs. In addition, the proposed round lot
definition would result in economic effects through its impact on the
Rule 606 compliance. Finally, the Commission preliminarily believes
that the proposed rules, though appearing to change the requirements of
several other rules and regulations, would not necessarily have an
economic impact through these other rules and regulations.
For Rule 201 of Regulation SHO, the reference bid for the execution
of a short sale transaction could be higher under that proposal than it
is currently, potentially slightly increasing the burdens on short
selling. Currently, after the Short Sale Circuit Breaker triggers,
short sales can only execute at prices greater than the NBB. While
short sales are currently permitted to execute against any odd-lot
quotations that exist above the NBB, the proposed round lot definition
would reduce the instances of such odd-lot quotations. Therefore, the
proposal could result in a higher NBB and thus result in a slightly
higher benchmark price for short sale executions in stocks priced more
than $50, reducing the fill rate of short sales or increasing the time
to fill for short sales.
In addition, a potentially higher NBB price or potentially lower
protected best bid could marginally affect the trigger of the Short
Sale Circuit Breaker. In particular, the proposal could result in
slight delays in or a reduction in the number of Short Sale Circuit
Breaker triggers, or it could have the opposite effect. In particular,
an NBB that includes smaller round lots could result in a higher-priced
execution relative to an NBB that does not include smaller round lots.
This higher-priced execution could be above the price that would
trigger the Short Sale Circuit Breaker whereas an execution on a 100-
share quote would have triggered the circuit breaker. This could delay
the trigger if the price continues downward, such that the circuit
breaker still triggers, or the circuit breaker may not trigger at all
if the price rebounds after such an execution. On the other hand, if
the proposal results in a lower protected bid, it could have the
opposite effect on circuit breaker triggers: Triggering sooner and more
often.
The Commission preliminarily believes that the economic effects of
the potential impact on the Short Sale Circuit Breaker are unlikely to
be significant. These effects should not create implementation costs,
and the Short Sale Circuit Breaker should continue to function
consistent with its stated purpose. Notably, if the proposal would
result in not triggering as many Short Sale Circuit Breakers, it could
reduce ongoing compliance costs in situations in which the price
rebounds despite the lack of a price test on short sales.
Similarly, a potentially higher bid price or lower offer price
could affect the trigger of a Limit State under the LULD Plan. A lower-
priced NBO or a high-priced NBB could result in that quote being more
likely to touch a price band, thus triggering a Limit State, when it
otherwise would not have. Depending on whether the quote would have
otherwise rebounded, this could increase the number of Limit States
and/or Trading Pauses or could merely trigger such Limit States or
Trading pauses sooner. As in the case of the Short Sale Circuit
Breaker, the effects should not create implementation costs, and LULD
should continue to function consistent with its stated purposes. In
[[Page 16834]]
addition, the economic effects of this potential marginal change
depends largely on how often odd-lot quotations lead price declines or
lead price increases.
As discussed above,\975\ a number of Rule 605 execution quality
statistics are benchmarked to the NBBO. Under the proposed amendments,
the NBBO would be based on the proposed tiered, price-based round lot
sizes, which means any Rule 605 execution quality statistics that rely
on the NBBO as a benchmark would reflect the modified definition of the
NBBO. This could cause certain execution quality statistics to change
in higher priced stocks. As discussed above, the Commission
preliminarily believes that the NBBO would become narrower for some
stocks in higher price tiers. This could cause execution quality
statistics that are measured against the NBBO to change because they
would be measured against the new, narrower NBBO. For example,
execution quality statistics on price improvement for higher priced
stocks may show a reduction in the number of shares of marketable
orders that received price improvement because price improvement would
be measured against a narrower NBBO. However, the Commission
preliminarily believes that some of these changes may cause some Rule
605 statistics to more accurately reflect actual execution quality
because the NBBO based on the new definition for round lots may now
take into account more liquidity that the current NBBO ignores.\976\
The Commission preliminarily believes that these effects would be
larger for stocks in higher price tiers because their new round lot
definition would include fewer shares.
---------------------------------------------------------------------------
\975\ See supra Section III.C.1(d)(i).
\976\ In the hypothetical case of a stock in which there are
often valuable odd-lot quotes, broker-dealers trading in this stock
can currently use these odd-lot quotes to improve on the NBBO, and
this improvement might be reflected in Rule 605 statistics. Under
the proposed change, if this stock is priced over $50 per share,
then some of these odd-lot quotes could end up being defined as
round lots under the new definition and thereby end up the basis for
the NBBO. With these quotes as the NBBO, the broker-dealer would no
longer appear to be improving over the NBBO in its execution, and
Rule 605 statistics may appear to indicate a decrease in execution
quality. However, they would, in fact, merely be reflecting a more
accurate picture of the market circumstances at the time of
execution.
---------------------------------------------------------------------------
In addition, the NBBO midpoint in stocks priced higher than $50
could be different under the proposal than it otherwise would be,
resulting in changes in the estimates for Rule 605 statistics
calculated using NBBO midpoint, such as effective spreads. In
particular, at times when bid odd-lot quotations exist within the
current NBBO but no odd-lot offer quotations exist (and vice versa),
the midpoint of the proposed NBBO would be higher than the current NBBO
midpoint. For example, if the NBB is $60 and the NBO is $60.10, the
NBBO midpoint is $60.05. Under the proposal a 50 share buy quotation at
$60.02 would increase the NBBO midpoint to $60.06. Using this proposed
midpoint, effective spread calculations for buy orders would be lower
but would be higher for sell orders. More broadly, the proposal would
have these effects whenever the new round lot bids do not exactly
balance the new round lot offers. However the Commission does not know
to what extent or direction that odd-lot imbalances in higher priced
stocks currently exist, so it is uncertain of the extent or direction
of the change.
Additionally, a change in the rate of locked and crossed markets
could also affect how Rule 605 execution quality statistics are
calculated. The Commission preliminarily believes that orders received
when the NBBO is crossed for more than 30 seconds are generally not
included in Rule 605 execution statistics. To the extent the changes in
the definitions of round lots and protected quotes cause an increase in
the frequency or length of crossed markets, more orders could end up
being excluded from Rule 605 execution statistics, which could cause
some Rule 605 execution statistics to less accurately reflect actual
execution quality.
Finally, the Commission recognizes that such changes could force
market centers (or their third-party service providers) to revise their
processes for estimating the Rule 605 execution statistics. Such
changes would result in implementation costs.
The Commission recognizes that the NBBO serves as a benchmark in
SRO rules in addition to Exchange Act rules and NMS plans. For example,
the NBBO acts as a benchmark for various retail liquidity programs on
exchanges, for exchange market maker obligations, for some order types,
and for potentially many other purposes.\977\ As such, including
smaller quotes in the NBBO would change how these rules operate and
these changes could have economic effects. For example, having to post
more aggressive limit orders into retail liquidity programs could
reduce the already low volume by reducing the liquidity available but
could result in better prices for those retail investors able to
execute against that liquidity. In addition, a narrower NBBO could
effectively increase some market maker obligations, which could improve
execution quality for investors and/or provide a disincentive to being
a market maker on the margin. Alternatively, the exchanges with such
retail liquidity programs, order types, or market maker obligations
could elect to propose rule changes to maintain the current operation
of these rules. Such proposals could mitigate any follow-on economic
effects (both benefits and costs) but would require exchanges to incur
the expenses associated with proposing amendments to their rules. The
Commission understands that the proposed changes to the NBBO could
affect numerous other SRO rules and requests comment on any significant
follow-on economic effects.
---------------------------------------------------------------------------
\977\ For a discussion of the effect of changes to the NBBO on
order types and to exchange odd-lot ``roll-up'' practices for
protected quotes, see supra Section VI.C.1(c)(i). For discussion
related to changes to round lot size for stocks with round lots of
less than 100 shares, see supra note 946.
---------------------------------------------------------------------------
As discussed above,\978\ the proposed definition of round lot could
result in an increase in the number of indications of interest in
higher priced stocks that would be required to be included in 606(b)(3)
reports. Depending on the number of potential indications of interest
included as a result of the proposed rule, the Commission preliminarily
believes that these changes could increase the benefits of Rule
606(b)(3) with little to no effect on costs.\979\ In particular, the
inclusion could result in clients receiving information on order
routing for more of their orders, with the resulting benefits. Further,
because the incremental cost of adding orders to the reports is low,
the Commission does not expect that adding additional indications of
interest to the reports would significantly increase costs.
---------------------------------------------------------------------------
\978\ See supra Section III.C1 (discussion of how the definition
impacts Rule 606).
\979\ See 606 Adopting Release, supra note 227, for a discussion
of the benefits of 606(b)(3).
---------------------------------------------------------------------------
In addition, the Commission preliminarily believes that the
proposal may result in some rules appearing to change but such changes
might not result in economic effects. For example, the proposed
amendments may impact the compliance with Rules 602(a), 602(b),
604(a)(1), 604(a)(2), and Rule 610(c). It is unclear whether these
impacts would have economic effects. For example, exchanges may already
have procedures to collect and make available their best bids and
offers to vendors, regardless of the size of those best bids and
offers. Further, broker-dealers may already treat all bids and offers
as firm quotes regardless of size and may already display all customer
limit orders regardless of size. Finally,
[[Page 16835]]
exchanges may already pay the same rebates or charge the same access
fees regardless of order size. To the extent that these practices are
in place, there would be no economic effect from these changes. To the
extent that these practices are not in place, the proposal may result
in some additional compliance costs. The Commission invites comments on
the impact of the proposal with compliance cost for Rules 602(a),
602(b), 604(a)(1), 604(a)(2), and Rule 610(c).
(iv) Request for Comments
The Commission requests comments on its analysis of the economic
effects of the proposed amendments to the NBBO, protected quotes, and
other conforming changes. In particular, the Commission solicits
comment on the following:
210. Effectively, the proposed round lot definition reduces the
minimum quotation size for the NBBO, depending on the price of the
security. The Commission requests that commenters provide any insights
they may have as to the economic effects of price-improving odd-lot
quotes being reported as the NBBO in the new core data.
211. Do you agree with the Commission's data analysis of the
potential frequency of improvements to the NBBO and the magnitude of
improvements to the NBBO spread? Why or why not? Please provide
additional data analysis as needed to support your answer.
212. What would be the economic effects of the proposed changes to
the PBBO? For the twelve stocks that currently have a round lot defined
as one share, how often would such securities not have a protected best
bid (``PBB'') or protected best offer (``PBO'')? What would be the
economic effects of not having a PBB or PBO in these stocks? For stocks
that tend to have a significant number of odd-lots that are rolled-up
into the current PBBO, the proposed changes to the PBBO could widen the
PBBO spread. What would the magnitude of this increased spread be and
how often would the PBBO be wider? Would a wider PBBO necessarily
result in higher transaction costs for investors? If so, by how much
would transaction costs increase? Please explain and provide any data
analysis needed to support your answer.
213. How do exchanges currently calculate their protected quotes?
If the proposal were to allow odd-lots to be rolled up across prices to
create a protected quote, how would the PBBO be different than the
proposed PBBO? Would the economic effects of such a change be different
than the economic effects of the proposed protected quotes? Please
explain.
214. How would the changes to the NBBO and protected quotes affect
off-exchange executions? What benchmark price would ATSs,
internalizers, and other off-exchange venues use to price transactions?
Would this differ from current practice? Please explain. What would be
the effect of this on transaction costs of off-exchange executions? How
large would any change in transaction costs be?
215. How would the proposed changes to the NBBO and protected
quotes affect transaction costs incurred by various investor types--
e.g., active institutional investors, passive institutional investors,
and retail investors? Please explain. How large would any change in
transaction costs be for each investor type? Please provide any data
analysis needed to support your answer.
216. How would the proposed changes to the NBBO and PBBO affect
order routing decisions and the share of order flow captured by each
exchange and off-exchange venue? Would some exchanges or other venues
gain order flow while others lose order flow? What are the factors that
could determine a gain or loss in order flow? Can you quantify this
change in order flow? What would be the economic effects of any changes
in order flow? Would such changes result in net welfare gains or
losses? Please explain in detail.
217. Under the proposed NBBO, what would ATSs and other off-
exchange venues use as a benchmark to price executions on their system?
How would this affect execution quality for investors? How would the
proposed NBBO affect the operation of certain orders types on ATSs?
Please explain.
218. To what extent would the proposed NBBO result in additional
message traffic for those market participants who currently rely on SIP
data and, under the proposal, would receive and use NBBO but not depth
of book information? Would these market participants incur significant
initial costs to prepare to receive and use such additional message
traffic? Would these market participants incur significant ongoing
costs in receiving and using such additional message traffic? Do you
agree that most such broker-dealers currently pay for SIP NBBO data on
a ``per query'' basis and, therefore, would not incur significant
initial or ongoing costs as a consequence of any increase in message
traffic? Please explain.
219. To what extent would the proposal result in exchanges and
other trading venues incurring costs to reprogram their matching
engines to account for changes in the NBBO and protected quotes?
220. Do you agree with the Commission's assessment about the
implementation costs for implementing a definition of the protected
quote that differs from the NBBO? Why or why not? Please also submit
any insights you may have as to the size and scope of the effect of
this change.
221. Would the change to the NBBO result in an increase in the
proportion of time in which the market is locked or crossed? Why or why
not? If so, what would be the economic effects of this increase? Would
this effect vary across securities? Please explain in detail.
222. How often do locks or crosses occur between odd lot orders
today? Please provide any data analysis needed to support your answer.
223. Would an increase in locked or crossed markets result in
market participants incurring additional implementation costs to
account for this increase? If so, what would be the magnitude of the
additional implementation costs? Please quantify. Do you agree with the
Commission's assessment of the relevant costs?
224. Do you agree that the proposed definition of the NBBO could
change the benchmark price for short sale executions following a
trigger of Rule 201 of Regulation SHO? What would be the economic
effects of the changes in the benchmark? Would the proposal
significantly increase the burdens on short selling following a
trigger? Please explain.
225. Do you agree that the proposed definition of the NBBO could
reduce the frequency of triggers of Rule 201 of Regulation SHO? Would
such a reduction have significant economic effects? Why or why not?
Please explain.
226. How would the proposal alter the operation of Rule 605? If so,
would such changes have any economic effects? Would execution quality
appear better or worse for all market participants or would it affect
the relative appearance of execution quality? Would the changes result
in actual changes to execution quality or just apparent changes in
execution quality? Would the changes result in fewer orders being
included in the Rule 605 statistics? Please explain.
227. The proposed changes to the NBBO and Protected Quotes likely
affect the operation of numerous SRO rules. Please provide information
on the number and type of SRO rules that rely on the NBBO or protected
quotes. Assuming the SROs do not propose amendments to these rules,
what would be the effect of the proposed changes to the NBBO and
protected quotes on the
[[Page 16836]]
operation of these SRO rules and the likely resulting economic effects?
How much would SROs expend in proposing to amend their rules, assuming
the SROs choose to amend their rules? Please provide estimates of such
costs.
2. Decentralized Consolidation Model
This section focuses on the economic effects pertaining to the
proposed decentralized consolidation model. The section first discusses
relevant broad economic considerations and economic benefits and costs
of the proposed model with regards to competing consolidators, then
addresses economic benefits and costs for self-aggregators, and
concludes with the discussion of conforming changes.
(a) Broad Economic Considerations About the Decentralized Consolidation
Model
The economic analysis of the effects of the decentralized
consolidation model assumes that upon the introduction of the model, a
sufficient number of competing consolidators would enter the market so
that competitive market forces would have a significant effect on their
behavior. Several factors affect the reasonableness of this assumption:
Competing consolidators' ability to offer differentiated products,
barriers to entry into the competing consolidator space, the fees for
data content and consolidation and dissemination services, and the
uncertainty regarding connectivity charges for proposed consolidated
market data. While the Commission recognizes uncertainty in these
factors and that certain economic impacts depend on this assumption,
the Commission believes that the risk of few or zero competing
consolidators is low. Further, the Commission notes that it would
consider the state of the market and the general readiness of the
competing consolidator infrastructure in determining whether to approve
an NMS plan amendment that would effectuate a cessation of the
operation of the existing exclusive SIPs.
(i) Factors
This section discusses the factors affecting the reasonableness of
the assumption that a sufficient number of competing consolidators
would enter the market.
a. Competing Consolidators' Ability To Offer Differentiated Products
The first factor that may affect the number of firms willing to
register as competing consolidators is firms' ability to offer
differentiated products. Market participants' demand for proposed
consolidated market data is likely to be heterogeneous because there
are many different investor types (e.g., retail investors, small banks,
market participants focused on value investment) that have differing
investment strategies. The ability of competing consolidators to
attract different investor types would depend on fees set by the
national market system plan(s) and competing consolidators' ability to
differentiate among themselves.\980\
---------------------------------------------------------------------------
\980\ See infra Section VI.C.2(a)(iii) for a discussion of the
influence of fees on the ability to differentiate.
---------------------------------------------------------------------------
Competing consolidators' ability to differentiate may be necessary
to ensure multiple competing consolidators are serving the market for
the following reasons. As discussed above, the production of
consolidated data involves relatively higher fixed costs and lower
variable costs.\981\ In such markets, the firms have additional
incentives to increase the number of their customers in order to spread
the fixed cost across a larger base of consumers. Therefore, due to the
fixed-cost nature of the market and resulting economies of scale,
without differentiation, the competing consolidator market could
consist of only one competing consolidator because the largest
competing consolidator would be able to offer the most competitive
price.
---------------------------------------------------------------------------
\981\ See supra Section VI.B.3(a).
---------------------------------------------------------------------------
However, the Commission preliminarily believes that the competing
consolidators would be able to differentiate among themselves by
product customization; by focusing on different segments of demand;
and/or by offering varying levels of other services such as customer
service, ease of user interface, analytics, data reformatting and
normalization services, and latency rates. Competing consolidators
could offer different consolidated data products that range from full
consolidated market data to subsets of consolidated market data such as
top of book products. In addition, because exchanges offer different
connectivity options, some competing consolidators could differentiate
themselves by specializing in lower latency data. Other competing
consolidators could target data users who might prefer not to have the
lowest latency product if the higher latency products came with a lower
price or additional analytics. Competing consolidators could offer a
range of user interfaces and analytics (e.g., various ways to display
consolidated data, or provide forecasting services) that appeal to
different data users or could even offer an analytical environment to
customize analytics (e.g., offer software tools allowing market
participants to analyze and summarize consolidate data).
Differentiation along these dimensions would allow competing
consolidators to offer different services at potentially different
prices to different types of end users. Therefore, the market would be
able to sustain multiple competing consolidator businesses, and this
would encourage further entry into the market.
b. Barriers to Entry
The second factor that would affect the number of competing
consolidators is the barriers to entry into the competing consolidator
space. Potential entrants into the competing consolidator business
could incur two types of barriers to entry: Business implementation
costs that emerge from the technical necessities of becoming a
competing consolidator and regulatory compliance costs. The business
implementation costs would include creation or modification of
technical systems to receive, consolidate, and disseminate the proposed
consolidated market data. Competing consolidators would need to have
systems and connections in place to receive data content from all SROs
and then to disseminate the proposed consolidated market data to a
variety of market participants who would purchase their products.
Further, based on the proposed rule, potential entrants would need to
satisfy two compliance requirements to become competing consolidators.
The first is the Regulation SCI requirements \982\ that would be
applicable to competing consolidators because the proposed rule amends
Rule 1000 of Regulation SCI to expand the definition of ``SCI entity''
and include competing consolidators. The second is the proposed Rule
614 requirements, including the Form CC requirements.\983\ There would
be both initial implementation and ongoing costs to comply with these
two regulatory requirements. Both the business implementation and
regulatory compliance costs would differ based on the entrant type. As
discussed above,\984\ the Commission preliminarily believes that five
types of entities may register to become competing consolidators: (1)
Market data aggregation firms, (2) broker-dealers that currently
aggregate market data for internal uses, (3) the existing exclusive
SIPs, (4) new non-SRO entrants, and (5) SROs. The
[[Page 16837]]
barriers to entry would differ across these five types of entities.
---------------------------------------------------------------------------
\982\ See supra Section IV.B.2(e)(ii).
\983\ See supra Section IV.B.2(e).
\984\ See supra Section V.D.2.
---------------------------------------------------------------------------
The Commission preliminarily believes that the existing market data
aggregation firms and some broker-dealers that currently aggregate
market data for internal uses could face large barriers to entry to
become competing consolidators. Because they currently collect,
consolidate, and, in some cases, disseminate market data to their
customers, much like competing consolidators would, the Commission
preliminarily believes that firms and broker-dealers that currently
aggregate proprietary market data would not have to extensively modify
their systems. However, the Commission preliminarily believes that each
of these firms and broker-dealers would incur costs to expand their
bandwidth and purchase hardware to receive information that is not
currently disseminated in the exchange proprietary market data feeds,
such as the proposed regulatory data and administrative data. Further,
based on the proposed rule, current market data aggregators and broker-
dealers that currently aggregate market data for internal uses would
incur new compliance costs to satisfy the two regulatory compliance
requirements to become competing consolidators. As discussed
below,\985\ these costs could be large and therefore may affect entry
and the benefits of the decentralized consolidation model.
---------------------------------------------------------------------------
\985\ See infra Section VI.C.2(e)(ii).
---------------------------------------------------------------------------
The Commission preliminarily believes that barriers to entry for
exclusive SIPs to become competing consolidators are low and are likely
lower than the barriers to entry of the existing market data
aggregation firms and some broker-dealers that currently aggregate
market data for internal uses. The Commission preliminarily believes
that the existing exclusive SIPs may choose to become competing
consolidators due to their years of experience in collecting,
consolidating, and disseminating market data. Because the systems used
by the exclusive SIPs already collect information in quotations and
transactions from the SROs, aggregate it, and disseminate it, the
Commission preliminarily believes that the exclusive SIPs would not
have to extensively modify their systems.\986\ The Commission
preliminarily believes that each exclusive SIP would incur costs to
expand their bandwidth and connections to consume and disseminate the
expanded consolidated data as well as to transmit it with lower
latency, and to program feed handlers to receive and normalize the
different formats of the data feeds developed by the exchanges.
Additionally, the exclusive SIPs would have some compliance costs. The
exclusive SIPs already are required to satisfy Regulation SCI
requirements since they are currently SCI entities. And they also have
experience with the consolidated market data business. Thus, any
exclusive SIP entering the competing consolidator business would only
have ongoing Regulation SCI and initial and ongoing compliance costs.
The Commission preliminarily believes that the difference between
compliance costs to satisfy these requirements and current exclusive
SIP compliance costs are small.\987\
---------------------------------------------------------------------------
\986\ Based on Commission staff expertise, the Commission
understands that existing exclusive SIPs' protocols for receiving
direct data from exchanges are not standardized and introduce
additional operational complexities. However, the operators of
exclusive SIPs, the exchanges, have figured out how to aggregate
direct feeds for the purposes of their exchange matching engines, so
they have the technology that would be deployable in the new
decentralized consolidation model.
\987\ See infra Sections VI.C.2(d) and VI.C.2(e)(ii).
---------------------------------------------------------------------------
The Commission anticipates that firms without prior experience in
the market data aggregation business may become competing consolidators
but that they would have the highest barriers to entry because they
would have to build new systems to comply with the proposed rules. The
new entrants would incur costs to program feed handlers to be able to
receive and normalize exchange data in different formats, and purchase
bandwidth and connections to exchanges and colocation. These costs
increase the fixed costs of participating as a competing consolidator
in the market, further contributing to the barriers to entry. New
entrants would also have the highest compliance costs among all
potential entrants, since they would have to build compliance systems
from scratch to satisfy both Regulation SCI and proposed Rule 614,
including Form CC, requirements. Therefore, the Commission
preliminarily believes that there may be a limited number of firms that
could enter the market data aggregation business for the first time.
The Commission anticipates that SROs may choose to become competing
consolidators. Although SROs may be able to leverage existing systems
in developing a system compliant with the proposed rules, the
Commission preliminarily believes that SROs would likely have to build
at least some new systems and thus may incur initial costs.\988\ At the
same time, despite higher initial costs, the Commission preliminarily
believes that the barriers to entry for SROs are relatively low due to
their current unique position in the industry and their particular
infrastructure and expertise. Similar to the existing exclusive SIPs,
SROs already are required to comply with Regulation SCI. SROs that have
experience in the consolidated market data business (e.g., exchanges
that currently operate an exclusive SIP) would only incur ongoing
Regulation SCI and initial and ongoing Form CC compliance costs. SROs
that do not have experience in consolidated market data business would
incur some initial Regulation SCI costs in addition to the ongoing
Regulation SCI costs. These SROs would also incur initial and ongoing
proposed Rule 614, including Form CC, compliance costs. The Commission
preliminarily believes that SROs that wish to become competing
consolidators could find it convenient to arrange an affiliate to do
this work so as to avoid having their competing consolidator business
subject to the same regulatory regime as an SRO.\989\
---------------------------------------------------------------------------
\988\ See supra Section V.D.2(e).
\989\ As explained above, SROs that wish to act as competing
consolidators would not be required to register with the Commission
on Form CC. See supra note 537.
---------------------------------------------------------------------------
c. Fees for Consolidated Market Data
Another factor that would affect the number of competing
consolidators relates to the fees that the effective national market
system plan(s) would set for the proposed consolidated market data
content and the price competing consolidators would charge market
participants for consolidation and dissemination services.\990\ If
these fees are set too high or have the effect of limiting product
differentiation,\991\ they could limit the opportunities for competing
consolidators to build profitable businesses.
---------------------------------------------------------------------------
\990\ See infra Section VI.C.2(b) (discussing economic analysis
of data content, consolidation, and dissemination, and connectivity
fees).
\991\ See supra Section VI.C.2(a)(i)a. (discussing potential
dimensions of product differentiation by competing consolidators).
---------------------------------------------------------------------------
Regarding the fees for the proposed consolidated market data
content, the Commission recognizes uncertainty in these fees. The fees
charged by the effective national market system plan(s) for the data
content necessary to create proposed consolidated market data would be
proposed by the operating committee(s) of the national market system
plan(s) and filed with the Commission.\992\ Because such fees depend on
future action by the effective national market system plan(s), the
Commission cannot be certain of the level of those fees or whether such
fees would provide discounts for those end users who wish to receive
subsets of
[[Page 16838]]
consolidated market data.\993\ As discussed further below, while these
fees would not be set by competition, they must be fair and reasonable
and not unreasonably discriminatory. Assuming that such fees would be
reasonably related to costs,\994\ the Commission believes the resulting
data content fees could be set at a level that could help sustain the
competing consolidator business. Further, if the national market system
plan(s) choose(s) to offer discounts for subsets of consolidated market
data, competing consolidators would have greater opportunity to offer
differentiated products to market participants. Likewise, exchanges
continuing to offer connectivity at different latencies would further
promote product differentiation by competing consolidators. The
Commission preliminarily believes that the national market system
plan(s) could propose such discounts because at least one exchange has
suggested tiered SIP data products.\995\
---------------------------------------------------------------------------
\992\ See supra Section IV.B.2(c).
\993\ See infra Section VI.C.2(b)(ii) for further discussion.
\994\ See supra note 439. (The Commission has previously stated
that similar fees can be shown to be fair and reasonable if they are
reasonably related to costs.)
\995\ See supra note 316 (citing an NYSE proposal to enhance the
exclusive SIPs by offering depth of book, odd-lot quotes, and
primary auction imbalance information in three new tiers of service,
each of which with different levels of data content).
---------------------------------------------------------------------------
The fees charged by competing consolidators to market participants
would also determine how many competing consolidators could profitably
exist. Given the high fixed-cost nature of the business, with multiple
competing consolidators each competing consolidator's fixed costs would
be spread over fewer customers than the costs with just one or few
competing consolidators. However, the market for consolidated market
data is relatively large enough \996\ that the Commission preliminarily
believes that the average cost per customer is likely to be reasonable
enough to support multiple competing consolidators.
---------------------------------------------------------------------------
\996\ See supra Section VI.B.2(c).
---------------------------------------------------------------------------
d. Connectivity
The fourth factor affecting the number of competing consolidators
is the uncertainty regarding connectivity charges for proposed
consolidated market data and their effects on the viability of the
decentralized model. The data connectivity fees would continue to be
set forth in the exchanges' fee schedules.\997\ Connectivity fees for
the provision of consolidated market data would be a fixed input cost
for competing consolidators, and, therefore, the level of connectivity
fees for proposed consolidated market data may affect the economies of
scale and the resulting number of competing consolidators. The
Commission invites comments on the likely effects of connectivity fees
for consolidated market data on the proposed competing consolidator
business.
---------------------------------------------------------------------------
\997\ See supra note 440.
---------------------------------------------------------------------------
(ii) Impact on Economic Effects of Decentralized Consolidation Model
As discussed in the previous section, there are several factors
that may affect the number of competing consolidators entering the
market. While the Commission recognizes uncertainty in some of these
factors, the Commission preliminarily believes that the risk of few
competing consolidators entering the market is low. The Commission also
preliminarily believes that the risk of zero competing consolidators is
even lower because the possibility of being the only consolidator in
the market for proposed consolidated market data could represent a
substantial business opportunity--especially given market participants'
different preferences for data content and latency--thus leading to
entry into the competing consolidator market space. In particular, a
monopolist in the market for proposed consolidated market data would be
able to charge high prices for the service fee portion of the overall
price \998\ and thus capture supra-competitive profits from all market
participants.\999\ Based on the discussion above, the Commission
preliminarily believes that entry into the competing consolidator
market space will continue until competing consolidators' profits
decrease to competitive levels.
---------------------------------------------------------------------------
\998\ See infra Sections VI.C.2(b) and VI.C.2(c).
\999\ Supra-competitive profits are profits above what can be
sustained in a competitive market.
---------------------------------------------------------------------------
The assumption that there would be a sufficient number of competing
consolidators entering the market affects some economic effects of the
decentralized consolidation model. Generally, many of the benefits and
competitive considerations below depend on this assumption. For
example, the Commission preliminarily believes that a higher number of
competing consolidators would lead to lower fees paid by market
participants for proposed consolidated market data,\1000\ larger gains
in efficiency in the delivery of proposed consolidated market data and
market data communication innovations,\1001\ as well as a reduction in
data consolidation and dissemination latencies.\1002\ In addition, some
of the costs discussed below also depend on this assumption. For
example, the transition to a competing consolidator model would
decrease regulatory compliance costs imposed by Regulation SCI on
existing exclusive SIPs that may register as competing consolidators,
by changing their status from ``critical SCI systems'' to standard
``SCI systems.'' \1003\
---------------------------------------------------------------------------
\1000\ See infra Section VI.C.2(b).
\1001\ See infra Section VI.C.2(c).
\1002\ Id.
\1003\ See infra Section VI.C.2(e)(ii) (discussing heightened
requirements for ``critical SCI systems'' versus standard
requirements for ``SCI systems'').
---------------------------------------------------------------------------
While the Commission preliminarily believes that the risk of few
competing consolidators is low, as discussed above,\1004\ in
determining whether to approve an NMS plan amendment that would
effectuate a cessation of the operation of the existing exclusive SIPs,
the Commission would consider the state of the market and the general
readiness of the competing consolidator infrastructure. Examples of
some of the things that the Commission could consider include the
status of registration, testing, and operational capabilities of
multiple competing consolidators, self-aggregators, and market
participants; capabilities of competing consolidators to provide
monthly performance metrics and other data required to be published
pursuant to proposed Rule 614(d)(5)-(6); and the consolidated market
data products offered by competing consolidators. Therefore, the
Commission believes the economic analysis below represents a reasonable
assessment of the potential economic effects of the proposal
notwithstanding the assumption of sufficient competing consolidators.
---------------------------------------------------------------------------
\1004\ See supra Section IV.B.6.
---------------------------------------------------------------------------
(b) Analysis of the Impact on Data Fees
This section discusses potential effects of the introduction of the
decentralized consolidation model on prices market participants pay for
consolidated market data. When comparing data fees for proposed
consolidated market data with current data fees, this economic analysis
holds data content constant. In other words, the fee comparison in this
analysis is between what market participants would pay under the
proposed rule versus what they currently would have to pay to access
the same content of the proposed consolidated market data. After
analyzing how fees could change for the same data content, the analysis
then considers the costs to various market participants, including
those market participants who are likely to expand the content of data
from that
[[Page 16839]]
they currently utilize. This last analysis is critical to understanding
the potential for many of the benefits and costs discussed above in
Section VI.C.1 and below in Section VI.D.1.
The Commission preliminarily believes that the fees for
consolidated market data could be lower than fees that market
participants pay for equivalent data today, but recognizes significant
uncertainty. The Commission also recognizes uncertainty in the fees
that subscribers choosing to receive a subset of consolidated market
data would pay under the proposed rule and that these subscribers could
pay higher or lower fees than they do today for equivalent data.
(i) Fees for Proposed Consolidated Market Data Content
The Commission first considers the effect of the proposed rule on
fees market participants would pay for proposed consolidated market
data versus what they currently would have to pay to access the same
content of the proposed consolidated market data. The Commission
preliminarily believes that fees for proposed consolidated market data
could be lower than fees for equivalent data today, but recognizes
significant uncertainty about how the effective national market system
plan(s) would set the fees for the data content and how SROs would set
the fees for connectivity necessary to create proposed consolidated
market data as well as how the competing consolidators would price
their services. For the purposes of this section, the Commission
assumes that the effective national market system plan(s) would set
fees for the proposed consolidated market data content that are
reasonably related to costs.\1005\
---------------------------------------------------------------------------
\1005\ See supra note 439. (The Commission has previously stated
that similar fees can be shown to be fair and reasonable if they are
reasonably related to costs.)
---------------------------------------------------------------------------
The Commission preliminarily believes that three sets of fees may
be affected as a result of the proposed rule: fees for the data content
necessary to create proposed consolidated market data, fees for the
consolidation and dissemination of proposed consolidated market data,
and fees for the connectivity services necessary to receive the
components of proposed consolidated market data from the SROs.
Regarding the SIP data, the first two fees are currently bundled into a
single fee, which covers SROs' data and the exclusive SIPs' operations
such as consolidation and dissemination of data. The proposed rule
would unbundle these two components and would allow competing
consolidators to provide the data consolidation and dissemination
services. Under the proposed rule, the fee for data content would be
set by the effective national market system plan(s).\1006\ The
operating committee(s) of the effective national market system plan(s)
would propose the data content fees for the SROs' data required to
create proposed consolidated market data and would then file the
proposed fees with the Commission for consideration pursuant to Rule
608.\1007\ Competing consolidators would charge a second fee for their
consolidation and dissemination services, which could also include
associates costs for data access at exchanges and transmission of data
between data centers. The fees for data consolidation and dissemination
would be determined by competition among competing consolidators.
Finally, SROs currently charge connectivity fees for both exclusive SIP
and proprietary data feeds. Under the proposal, SROs could charge
connectivity fees to competing consolidators and self-aggregators,
which must be consistent with statutory standards.\1008\ Competing
consolidators could charge connectivity fees to end users, which would
be subject to competitive forces.
---------------------------------------------------------------------------
\1006\ See supra note 96 (discussing amendments to the provision
regulating NMS plan(s) fee filings).
\1007\ See supra Section IV.B.4; supra note 433.
\1008\ Currently, connectivity fees are charged to the market
participants that connect to the exchange and not to end users. See
infra note 1017.
---------------------------------------------------------------------------
First, the Commission preliminarily believes that how the proposed
rule would affect the fees for the data content used to create proposed
consolidated market data is uncertain, primarily because they depend on
future action by the effective national market system plan(s), but the
Commission preliminarily believes that such fees would likely be lower
than today's fees for the equivalent data. Currently, market
participants who would like to access content equivalent to the data
content of the proposed consolidated market data would need to
separately purchase SIP data and additional data elements via
proprietary data feeds. Under the proposed rule, market participants
would be able to receive substantially similar content from one
source.\1009\ Further, market participants would pay the data content
fees set by the effective national market system plan(s) for NMS
stocks, which would be filed with the Commission under Rule 608 and be
subject to public comment.\1010\ Therefore, the analysis of the
potential impact on data content fees depends on, among other things,
whether the current fees for the proprietary data content that will be
included in the newly defined consolidated market data are fair and
reasonable and on how costs are likely to change. As discussed above,
the Commission does not believe that the proposal would significantly
increase SRO costs specifically for distributing data.\1011\ The
proposal could, on the other hand, increase the allocation of fixed
exchange costs to consolidated market data because the data content
would expand.\1012\ However, the Commission lacks the necessary
information to ascertain those impacts.\1013\
---------------------------------------------------------------------------
\1009\ Currently, fees for SIP data and proprietary data are
generally charged based on the number and type of end user of the
data. For example, the CTA/CQ Plan Schedule of Charges distinguishes
fees by professional and non-professional subscribers and the number
of devices. See CTA Plan, Schedule of Market Data Charges, supra
note 851. The Nasdaq UTP Plan, Exhibit 2 provides separate fees for
non-professionals and per device fees. See Nasdaq UTP Plan, supra
note 13. Similar user distinctions are made in proprietary data
products. See Nasdaq, Price List--U.S. Equities, available at
www.nasdaqtrader.com/Trader.aspx?id=DPUSdata#tv (last accessed Jan.
30, 2020) (showing Nasdaq TotalView usage fees, which provide fees
for professional and non-professional subscribers); NYSE Proprietary
Market Data Fees (as of Nov. 4, 2019), available at https://www.nyse.com/publicdocs/nyse/data/NYSE_Market_Data_Fee_Schedule.pdf
(showing the NYSE Integrated Feed fee schedule, which distinguishes
between professional and non-professional users).
\1010\ Rule 608 of Regulation NMS, 17 CFR 242.608.
\1011\ See supra Section VI.C.1(b)(iv).
\1012\ See infra Section VI.C.4(a) for a discussion of the
likely effects of the proposal on the revenues exchanges receive for
proprietary data.
\1013\ In a comment letter, IEX provided data that the SRO
markups on proprietary data may be large. In particular, IEX
compared its own costs of providing proprietary market data with the
fees charged by other exchanges for comparable produces and found
markups of 900-1,800 percent. See Katsuyama Letter II; Letter to
Brent J. Fields, Secretary, Commission, from John Ramsay, Chief
Market Policy Officer, Investors Exchange LLC (Feb. 4, 2019)
(discussing the ``all-in'' cost to trade concept advocated by other
exchanges).
---------------------------------------------------------------------------
The Commission can deduce, however, that data content fees for the
proposed consolidated market content are unlikely to increase. As
discussed above,\1014\ the Commission understands that SRO proprietary
feeds for depth of book data are significantly more expensive than the
exclusive SIP feeds. The effective national market system plan(s) for
NMS stocks would be unlikely to implement fees for the proposed
consolidated market data content that are higher than the current fees
for equivalent data unless it is demonstrated that the higher proposed
fees are justified under the applicable legal standard.
---------------------------------------------------------------------------
\1014\ See supra Section VI.B.2(c).
---------------------------------------------------------------------------
[[Page 16840]]
The Commission preliminarily believes that the proposal is likely
to reduce data content fees. The Commission expects that unless the
Commission approves a filing for data content fees that would set fees
at a level that the effective national market system plan(s) has shown
is consistent with statutory standards, the fees for the proposed
consolidated market data--which is equivalent to the existing exclusive
SIP data plus additional proprietary DOB data product elements--would
remain at current SIP data fee levels and thus would be lower than the
current fees for the equivalent data.\1015\ Absent information on data
costs, the Commission, at this time, recognizes that such fees could be
lower than current exclusive SIP fees, similar to current exclusive SIP
fees, greater than current exclusive SIP fees but less than the fees
for the current equivalent of proposed consolidated market data, or
similar to the current equivalent of proposed consolidated market data.
However, the Commission preliminarily believes that such data content
fees would be lower than current fees for equivalent data because,
between 2010 and 2018, the proprietary data feed portion of the current
fees for equivalent data appears to have increased at a rate that seems
unlikely that costs have matched.\1016\
---------------------------------------------------------------------------
\1015\ See supra note 96 (noting the Commission's proposal to
rescind the provision of Rule 608 that allows a proposed amendment
to an effective national market system plan(s) to become effective
upon filing if the proposed amendment establishes or changes a fee
or other charge).
\1016\ See supra Section VI.B.2(c).
---------------------------------------------------------------------------
Second, the Commission preliminarily believes that data
consolidation and dissemination fees for proposed consolidated market
data would be lower than consolidation and dissemination fees market
participants currently pay to receive equivalent data. Consolidation
and dissemination fees that competing consolidators would charge would
cover several associated costs, including fixed costs of hardware and
software; processing to take in data; processing for consolidation
(including compiling the NBBO and protected quotes); distribution of
the data; and connectivity fees paid to exchanges to acquire the data
for consolidation. The variable costs of the competing consolidators
would be minor in comparison because additional data users would have a
minimal impact on the costs of competing consolidators. The fixed costs
of the competing consolidators could be spread out among its
subscribers, including subscribers utilizing other proprietary data
services provided by competing consolidators that are not covered by
the fees established by the effective national market system plan(s).
To receive data equivalent to proposed consolidated market data
today, market participants would have to pay separately for a portion
of exclusive SIPs' cost to perform consolidation and dissemination of
market data and a fee for consolidation and dissemination of additional
data elements of proposed consolidated market data that are available
via third-party providers of proprietary market data, who face
competitive pressures. As discussed above,\1017\ exclusive SIPs are not
constrained by competition and thus have lower incentives to reduce
their costs. By comparison, the Commission preliminarily expects that
the competition among competing consolidators would put downward
pricing pressure on these service fees. The Commission recognizes that
the stronger the competition among competing consolidators, the harder
it would be for any given competing consolidator to increase its
consolidation and dissemination fees and make supra-competitive profits
from these services.\1018\ Further, because having more subscribers
could help competing consolidators spread their fixed costs out, any
increase in the number of subscribers of current market data
aggregators who would become competing consolidators would reduce the
service fees of those aggregators in equivalent data. For these
reasons, the Commission preliminarily believes that the competition
among competing consolidators would lead to lower consolidation and
dissemination fees for proposed consolidated market data as compared to
these fees for equivalent data today.
---------------------------------------------------------------------------
\1017\ See supra Section VI.A.2.
\1018\ See supra Section VI.C.2(c).
---------------------------------------------------------------------------
Third, the Commission preliminarily believes that connectivity fees
charged by competing consolidators for proposed consolidated market
data would also be lower than connectivity fees market participants
would currently have to pay to receive equivalent data. To receive data
equivalent to proposed consolidated market data today, market
participants currently have to pay separately a connectivity fee to the
exchanges to access SIP data and a connectivity fee to the exchanges or
market data aggregators to access additional data elements of proposed
consolidated market data that are not part of SIP data. Under the
proposed rule, the Commission expects that market participants would
pay only one connectivity fee for proposed consolidated market data,
set by competing consolidators, and this connectivity fee would be
subject to competition among competing consolidators. By contrast,
current exchange connectivity fees are not as competitive because an
exchange has sole control over its own connectivity charge for its
proprietary market data. Therefore, the Commission preliminarily
believes that connectivity fees that would be charged by competing
consolidators for proposed consolidated market data would be lower than
the connectivity fees for equivalent data today.
The Commission recognizes that SROs would charge connectivity fees
to competing consolidators and self-aggregators. The exchanges could
continue to set connectivity fees for data feeds as part of their SRO
fee schedules and these fees must continue to meet statutory
standards.\1019\ The exchanges' connectivity fees are not currently
based on the number of end users, and therefore the Commission
preliminarily believes that the connectivity fees for proposed
consolidated market data would not be directly passed through to the
end users. SRO connectivity fees would be fixed costs incurred by self-
aggregators and by competing consolidators, a cost the latter could
spread out among their end users as a part of the consolidation and
dissemination fees.
---------------------------------------------------------------------------
\1019\ For example, under Section 6(b)(4) of the Exchange Act,
the rules of an exchange must ``provide for the equitable allocation
of reasonable dues, fees, and other charges among its members and
issuers and other persons using its facilities.'' 15 U.S.C.
78f(b)(4).
---------------------------------------------------------------------------
Additionally, because the total fees for the equivalent of proposed
consolidated market data are likely to decline as a result of the
proposal, some market participants may choose to purchase more
consolidated market data content than they purchase today, such as
purchasing the expanded core data. The likelihood of this outcome would
depend on the difference between total fees for proposed consolidated
market data and current total fees for equivalent data content. The
economic effect of more market participants purchasing expanded core
data is discussed above in Section VI.C.1(b).
(ii) Fees for the Content of Current SIP Data
The Commission also considers the effect of the proposed rule on
fees market participants currently pay for SIP data content versus what
they would pay for equivalent content under the decentralized
consolidation model.
[[Page 16841]]
The Commission recognizes that a significant proportion of market
participants currently purchase only SIP data and/or the unconsolidated
equivalent of SIP data.\1020\ Under the proposed rule and conditional
on fees for proposed consolidated market data, while some of these
market participants would choose to purchase more data than they
purchase today, other market participants would continue to purchase
content equivalent to current SIP data (e.g., NBBO and TOB). The
Commission preliminarily believes that data fees paid for equivalent
data content could be higher than current SIP data fees or could be
lower than current SIP data fees. Whether the fees are higher or lower
depends on several factors: the data content fee structure proposed by
the effective national market system plan(s) for NMS stocks, how
competing consolidators allocate their costs of processing (i.e.,
receiving, consolidating, and disseminating) consolidated market data,
and any connectivity fees charged by competing consolidators for
consolidated market data.
---------------------------------------------------------------------------
\1020\ See supra Section VI.B.2(a).
---------------------------------------------------------------------------
The Commission preliminarily believes that the data content fee
structure proposed by the effective national market system plan(s) for
NMS stocks under the decentralized consolidation model is an important
factor in determining whether total data fees (i.e., the sum of data
content fees, consolidation and dissemination fees, and connectivity
fees) for the equivalent of current SIP data could be higher or lower
under the proposed rule.\1021\ The Commission recognizes that because
of the expanded scope of proposed consolidated market data relative to
the current SIP data, the data content fee market participants would
pay for data necessary to create proposed consolidated market data
might be higher than the portion of current SIP data fees that accounts
for the data content. Until the effective national market system
plan(s) propose fees for the data content necessary to create proposed
consolidated market data, the Commission is unable to determine whether
this fee structure would charge lower fees for end users who wish to
receive subsets of consolidated market data from competing
consolidators. In other words, the Commission is unable to determine
whether the effective national market system plan(s) for NMS stocks
would propose a fee structure reflecting different tiers of data
content for the proposed consolidated market data. Without such a
structure, all subscribers to consolidated market data would pay the
same data content fee regardless of whether they wish to receive all or
a subset of consolidated market data. As a result, the proposal could
increase the content fees for the equivalent of SIP data. This
potential outcome is highly dependent on the effective national market
system data plan(s) and fee proposals.\1022\
---------------------------------------------------------------------------
\1021\ See supra Section VI.B.2(c).
\1022\ The Commission has proposed an order to modernize the
governance of the data plans. See supra note 8.
---------------------------------------------------------------------------
The fees for data consolidation and dissemination depend on how
competing consolidators allocate fixed costs among subscribers
receiving different subsets of data. As discussed above,\1023\ the
Commission expects competing consolidators to offer a menu of products
and services, regardless of the data structure of the effective
national market system plan(s). Competing consolidators could elect to
charge lower consolidation and dissemination fees to subscribers
receiving subsets of data compared to fees charged to subscribers
receiving all consolidated market data. In fact, the Commission
preliminarily believes that competitive pressure could result in such a
fee structure. As a result, the data consolidation and dissemination
component of total fees charged to those who purchase content
equivalent to SIP data could be lower than this component of current
SIP data fees today.
---------------------------------------------------------------------------
\1023\ See supra Section VI.C.2(a).
---------------------------------------------------------------------------
The fees for connectivity services paid by end users are likely to
decline for some users but could increase for others. Currently, some
SIP data users connect to the exchanges that are the administrators of
exclusive SIPs and pay connectivity fees to access the SIP data. These
connectivity fees are paid directly to the exchanges and do not go to
the exclusive SIPs. There are also SIP data users that do not connect
to the exchanges and thus do not pay SRO connectivity fees for SIP
data, but may pay fees to other market data service providers. Under
the proposed rule, both types of current SIP data subscribers may be
charged a connectivity fee by competing consolidators when they
subscribe to proposed consolidated market data. The Commission
acknowledges that there is uncertainty over whether the competing
consolidator connectivity fees would be larger or smaller than what
some of the SIP data users currently pay in connectivity fees. The
overall connectivity fees under the proposed rule may be larger if
competing consolidators are not constrained by competition such that
they can charge higher connectivity fees without concern for
subscribers' scope of content. On the other hand, as discussed above
\1024\ and given the potential connectivity options available, the
Commission preliminarily believes competing consolidators will be under
competitive pressure, and as such, they may offer a range of
connectivity fees, including based on market participants' scope of
data content and speed choice. In that case, SIP data subscribers who
currently pay connectivity fees to the exchanges may see their
connectivity fees decline.
---------------------------------------------------------------------------
\1024\ See supra Section VI.C.2(b)(i).
---------------------------------------------------------------------------
(c) Benefits of the Decentralized Consolidation Model Pertaining to
Competing Consolidators
As discussed above,\1025\ currently SIP data is collected,
calculated, and disseminated to market participants through a
centralized consolidation model with an exclusive SIP for each NMS
stock. Even though current exclusive SIPs are selected through a
bidding process,\1026\ the Commission preliminarily believes that a
competitive marketplace is more capable of producing the benefits that
come from competitive forces than the process of soliciting bids for
exclusive contracts.\1027\ In particular, the Commission preliminarily
believes that the decentralized consolidation model would have three
potential benefits for market participants. First, the Commission
believes that the decentralized consolidation model offers the
potential for more gains in efficiency in the delivery of consolidated
market data, which may include cost savings that could be passed on to
market participants, to emerge over time. Second, the Commission
believes the model would enable consolidated market data delivery to
continue to keep up with market data communication innovations in the
future, in a way that the current centralized consolidation model has
not. Third, the Commission preliminarily expects the new model would
significantly reduce the various types of content and latency
differentials that currently exist between SIP data and proprietary
data products.\1028\
---------------------------------------------------------------------------
\1025\ See supra Sections IV.A, VI.B.2(b).
\1026\ See supra Section VI.B.1.
\1027\ See supra Section VI.A.2; infra Section VI.D.2.
\1028\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------
The Commission preliminarily believes that introducing competition
into the provision of consolidated
[[Page 16842]]
market data and dissemination services would present more incentives
for reducing costs and lowering prices for those services,\1029\ and
innovating on product offerings more tailored to the needs of the
consumers. It is therefore the Commission's preliminary expectation
that the decentralized consolidation model would result in a meaningful
increase in investments intended to lower costs and/or improve quality
in the provision of consolidated market data. This represents an
economic benefit for the industry, some of which would be kept by
competing consolidators as profit, and some of which would be received
by market participants in the form of lower fees and/or improved
quality for competing consolidator services.
---------------------------------------------------------------------------
\1029\ See infra Section VI.D.2.
---------------------------------------------------------------------------
As discussed above,\1030\ some market participants may benefit as a
result of the introduction of the decentralized consolidation model
because of the lower price for proposed consolidated market data
relative to today's price for consolidated market data holding data
content constant. These market participants are likely interested in
expanded consolidated market data, and currently would have to pay to
obtain additional data elements via proprietary data feeds. Therefore,
these market participants could pay a lower price for expanded
consolidated market data under the decentralized consolidation model.
---------------------------------------------------------------------------
\1030\ See supra Section VI.C.2(b).
---------------------------------------------------------------------------
The Commission preliminarily believes that the decentralized
consolidation model would provide a benefit to market participants by
increasing the amount of innovation in the consolidation and
dissemination of consolidated market data. This is a benefit because it
represents an improvement over the current system for dissemination of
SIP data, in which the lack of competitors reduces the incentives of
the exchanges that govern SIPs to innovate.\1031\ As mentioned above,
the Commission preliminarily believes that the current system of
disseminating SIP data through exclusive SIPs, which are managed by
Equity Data Plans' operating committees, is not well suited to keep up
with the pace of innovation in data processing and communication in the
market.\1032\ The decentralized consolidation model would place the
task of determining the method of consolidation and dissemination to
free market forces, which the Commission preliminarily believes would
make it easier to innovate rapidly and maintain competitive parity with
other market participants. The end result of this improved efficiency
in investment decisions by consolidators would be to improve the
quality and reliability of market data consolidation and dissemination
services, which would result in market participants having better data
to make trading decisions.\1033\ The Commission preliminarily believes
this would lead to better trading decisions, lower execution costs, and
would help reduce information asymmetries between market participants
that currently solely rely on SIP data and market participants who
purchase the exchanges' proprietary data products. The Commission
preliminarily believes that the magnitude of this benefit depends on
the assumption that there would be a sufficient number of competing
consolidators entering the market.
---------------------------------------------------------------------------
\1031\ See supra Section VI.A.2.
\1032\ Id.
\1033\ See infra Section VI.D.1.
---------------------------------------------------------------------------
The Commission preliminarily believes that another benefit of the
decentralized consolidation model would be to substantially reduce the
latency differential between proposed consolidated market data and
proprietary data. This belief is based upon the Commission's assumption
that the business practices of current market data aggregators, some of
which will likely become competing consolidators, would serve as a
model for how competing consolidators would operate under the
decentralized consolidation model.\1034\ Current market data
aggregators have achieved connectivity, transmission, consolidation,
and distribution speeds that are meaningfully faster than SIP data even
as they process larger amounts of data than SIP data.\1035\ Therefore,
the Commission believes that competition among competing consolidators
would keep market data consolidation and distribution feeds close to
the speeds achieved in the private market currently.
---------------------------------------------------------------------------
\1034\ See supra Section VI.C.2(a).
\1035\ The Commission preliminarily believes that if the
existing exclusive SIPs choose to become competing consolidators in
the decentralized consolidation model, the competition with other
competing consolidators will incentivize them to improve their
connectivity, transmission, consolidation, and distribution speeds
to the levels of other competing consolidators.
---------------------------------------------------------------------------
The Commission preliminarily believes that all forms of latency
discussed previously--geographic, consolidation, and transmission
latency \1036\--have the potential to be the source of these reductions
in the latency differential. The Commission understands that the
existing market data aggregator business does not rely on the single-
instance consolidator model but instead produces a separate
consolidated feed at each data center. This has the potential to
substantially reduce geographic latency for data centers that are not
co-located with one of the existing exclusive SIPs because it means new
information at a data center can be used immediately at that data
center instead of being returned to the processing center first. The
Commission therefore expects that the decentralized consolidation model
would serve to substantially reduce geographic latency in the same way
for market participants. For instance, the existing market data
aggregators already have infrastructure in place to consolidate market
data in the described way. And if the existing exclusive SIPs become
competing consolidators, they would also have to produce separate
consolidated feeds at each data center to be able to compete with other
competing consolidators. Therefore, the Commission preliminarily
believes that the geographic latency reduction in the decentralized
consolidation model can be achieved even if one existing market data
aggregator enters the competing consolidator business. Therefore, the
benefit of the decentralized consolidation model with regard to
geographic latency would not rely heavily on the assumption that a
large number of consolidators would enter the market.\1037\
Importantly, as discussed above,\1038\ geographic latency is the
biggest cause of latency differentials between current SIP data
distributed by exclusive SIPs and current proprietary data feeds.
---------------------------------------------------------------------------
\1036\ See supra Section VI.B.2(b).
\1037\ See supra Section VI.C.2(a).
\1038\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------
Also, the Commission understands that many current market data
aggregators rely on wireless communications to receive data from
various exchange data centers, using fiber connections as a backup in
case of bad weather. To the extent that wireless communications are
faster than current transmission methods for SIP data, the Commission
expects the decentralized consolidation model to reduce transmission
latency as well. In addition, to the extent that existing market
aggregators have developed faster consolidation methods, the Commission
expects that the decentralized consolidation model would also reduce
consolidation latency. The Commission preliminarily believes that the
effect of the decentralized consolidation model on the consolidation
and transmission
[[Page 16843]]
latencies depends on robust competition among competing consolidators
going forward. The Commission preliminarily believes that to the extent
that the benefits of faster access to market data come from the ability
to engage in more timely participation in the provision of liquidity,
this effect represents an economic benefit to the equity market
generally because it would provide more fair and equal access to market
data and would reduce information asymmetries among market
participants. In particular, to the extent that the existing advantages
of having access to fast proprietary data feeds are derived from
trading strategies exploiting differentials in the speed of access to
market data (i.e., exploiting traders in the market who currently rely
solely on slower SIP data), this benefit would represent a transfer
from current users of faster proprietary data to the users of proposed
consolidated market data in the decentralized consolidation model that
would now also have access to faster data.\1039\
---------------------------------------------------------------------------
\1039\ See also Don Bollerman, A NYSE Speed Bump You Weren't
Aware Of, IEX available at https://iextrading.com/about/press/op-ed/
(last accessed Jan. 8, 2020) (discussing the effect of speed
differentials on trading).
---------------------------------------------------------------------------
In order for both economic benefits and transfers to be realized,
at least some market participants that are new users of fast and more
content-rich consolidated market data would need to possess the
technological capability to take advantage of the speed improvements
the decentralized consolidation model is likely to provide. It is the
Commission's preliminary understanding that such technological
capabilities are expensive to acquire, and this fact would reduce the
amount of benefit and the degree to which individual market
participants can profit (through the transfers mentioned above) from
the decrease in data latency.
If even a small delay remains between the typical competing
consolidator's consolidated market data feed and proprietary data
feeds, then the benefits of increased consolidated market data delivery
speed described above are likely to be smaller. This belief is based on
the Commission's preliminary understanding that speed gains at these
timescales only matter insofar as to help a market participant react to
new information faster than other market participants.\1040\
---------------------------------------------------------------------------
\1040\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------
Additionally, the Commission notes two other potential benefits of
the proposed amendments. First, market participants could potentially
save on the cost of consolidated market data because they will only
need to subscribe to one competing consolidator instead of two
exclusive SIPs (i.e., Nasdaq UTP and CTA/CTQ). To the extent market
participants can subscribe to one competing consolidator, they could
save money by not having to pay the costs of processing consolidated
market data to two different providers. Additionally, market
participants may also save on their infrastructure costs if they have
the ability to customize their data purchases and receive, for example,
narrower data content than proposed consolidated market data. Market
participants may achieve this if competing consolidators offer tiered
levels of service with different data contents and different service
fees based on the needs of specific types of investors similar to what
one SIP proposed recently.\1041\
---------------------------------------------------------------------------
\1041\ See supra Section VI.C.2(b); supra note 267.
---------------------------------------------------------------------------
Second, expanding Regulation SCI to include competing consolidators
would help ensure that competing consolidators' systems involved in the
collection, consolidation, and dissemination of proposed consolidated
market data are able to maintain their operational capability,
including the ability to maintain effective operations, minimize or
eliminate the effect of performance degradations, and have sufficient
backup and recovery capabilities. The Commission preliminarily believes
that competing consolidators being subject to the Regulation SCI
requirements would lead to, among other things, fewer interruptions in
the data delivery process and, thus, may result in better trading
decisions.\1042\
---------------------------------------------------------------------------
\1042\ See infra Section VI.C.2(e)(i).
---------------------------------------------------------------------------
(d) Costs of the Decentralized Consolidation Model Pertaining to
Competing Consolidators
The Commission preliminarily believes that the proposed amendments
that introduce a decentralized consolidation model are likely to have
both direct and indirect costs on potential competing consolidators,
SROs, existing exclusive SIPs, and market participants, as detailed
below. As explained below, the Commission preliminarily estimates that
the direct costs to each potential competing consolidator would be
between around $5.12 MM and $5.13 MM in ongoing annual costs, and total
one-time costs of up to between approximately $897,000 and $2.40 MM,
depending on entity type.\1043\ Further, the Commission preliminarily
estimates that costs to each SRO from the proposed amendments regarding
the decentralized consolidation model include up to around $246,000 in
the direct one-time costs, and around $128,000 in the ongoing annual
costs. The Commission expects, however, that the proposed amendments
that introduce a decentralized consolidation model would have
additional indirect costs. Some of these direct and indirect costs are
likely to be passed on to investors.
---------------------------------------------------------------------------
\1043\ These costs do not include the costs of compliance with
expanded Regulation SCI, which are discussed below. See infra
Section VI.C.2(e)(ii).
---------------------------------------------------------------------------
As discussed above,\1044\ the Commission preliminarily believes
that five types of entities may register to become competing
consolidators and would have to build systems, or modify existing
systems, that comply with the proposed rules: (1) Market data
aggregation firms, (2) broker-dealers that currently aggregate market
data for internal uses, (3) the existing exclusive SIPs, (4) new
entrants, and (5) SROs. The Commission preliminarily estimates that all
direct ongoing annual costs and some one-time costs would be common
among all competing consolidators and that some one-time costs would
vary depending on entity type.
---------------------------------------------------------------------------
\1044\ See supra Sections V.D.2, VI.C.2(a).
---------------------------------------------------------------------------
For purposes of the PRA,\1045\ the Commission preliminarily
estimates that direct ongoing costs for each competing consolidator,
except for SROs, would be $5,126,167 and consist of the following
costs: Costs of $5,744 to amend Form CC prior to the implementation of
material changes to pricing, connectivity, or products as well as to
correct inaccurate or incomplete information; \1046\ costs of $25 to
obtain digital IDs for the purposes of signing the Form CC
annually,\1047\ costs of around $5.07 MM associated with operating and
maintaining a competing consolidator system; \1048\ costs of $120 to
ensure that it has posted the correct direct URL hyperlink to the
Commission's website on its own website; \1049\ costs of $4,360 of
recordkeeping; \1050\ and costs of
[[Page 16844]]
$45,222 to prepare and make publicly available a monthly report.\1051\
---------------------------------------------------------------------------
\1045\ Direct costs cited in this section are quantified from
estimates in the PRA. See supra Section V.
\1046\ See supra Section V.D.1(b); supra note 671.
\1047\ See supra Section V.D.1(b).
\1048\ These costs are composed of labor costs of $176,250,
external costs of $123,725 to operate and maintain systems to comply
with Rules 614(d)(1)-(d)(4), external costs of $168,000 to purchase
market data from the SROs, and an additional annual ongoing external
cost of $4,602,720 to co-locate itself at four exchange data
centers. See supra Section V.D.2(f).
\1049\ See supra Section V.D.2(h); supra note 724.
\1050\ See supra Section V.D.3(b).
\1051\ See supra Section V.D.4(b); supra note 732.
---------------------------------------------------------------------------
The Commission preliminarily estimates that direct ongoing costs
for each SRO as a competing consolidator would be $5,120,398 and would
consist of the same costs as for all other competing consolidators
excluding the costs of $5,744 to amend Form CC prior to the
implementation of material changes to pricing, connectivity, or
products as well as to correct inaccurate or incomplete information,
and the costs of $25 to obtain digital IDs for the purposes of signing
the Form CC.\1052\
---------------------------------------------------------------------------
\1052\ These costs are excluded because SROs are not required to
file Form CC. See supra Section V.D.1(a).
---------------------------------------------------------------------------
The Commission preliminarily estimates that direct one-time costs
that are common across all competing consolidators would be $89,348 and
consist of the following costs: Costs of $120.50 to publicly post the
Commission's direct URL hyperlink to its website upon filing of the
initial Form CC; \1053\ costs of $8,720 to keep and preserve at least
one copy of all documents made or received by it in the course of its
business and in the conduct of its business; \1054\ and costs of
$80,507 to produce the monthly reports.\1055\
---------------------------------------------------------------------------
\1053\ See supra Section V.D.2(g); supra note 721.
\1054\ See supra Section V.D.3(a); supra note 726.
\1055\ See supra Section V.D.4(a); supra note 727.
---------------------------------------------------------------------------
The Commission preliminarily estimates that the total direct costs
to each market data aggregation firm or each broker-dealer that
currently aggregate market data for internal uses that would decide to
register as a competing consolidator would include $5,126,167 in
ongoing annual costs, as discussed above, and total one-time costs of
$896,542. The one-time costs are composed of costs of $93,540 to
complete the initial Form CC; \1056\ costs of $50 to obtain digital IDs
for the purposes of signing the initial Form CC; \1057\ costs of $5,604
to file two amendments to Form CC; \1058\ labor costs of $293,750;
\1059\ external costs of $206,250 to modify its systems to comply with
Rules 614(d)(1)-(d)(4), external costs of $14,000 to purchase market
data from the SROs, an additional initial external cost of $194,000 to
co-locate itself at four exchange data centers; \1060\ as well as
$89,348 in costs that are common to all competing consolidators, as
described above.
---------------------------------------------------------------------------
\1056\ See supra Section V.D.1(a); supra note 664.
\1057\ See supra Section V.D.1(a).
\1058\ Id.
\1059\ See supra Sections V.D.2(a), V.D.2(b); supra notes 676,
683.
\1060\ See supra Sections V.D.2(a), V.D.2(b).
---------------------------------------------------------------------------
The Commission preliminarily estimates that the total direct costs
to each existing SIP that would decide to register as a competing
consolidator would include $5,126,167 in ongoing annual costs, as
discussed above, and total one-time costs of $1,396,542. The one-time
costs per existing SIP are composed of costs of $93,540 to complete the
initial Form CC; \1061\ costs of $50 to obtain digital IDs for the
purposes of signing the initial Form CC; \1062\ costs of $5,604 to file
two amendments to Form CC; \1063\ labor costs of $587,500; \1064\
external costs of $412,500 to modify its systems to comply with Rules
614(d)(1)-(d)(4), external costs of $14,000 to purchase market data
from the SROs, an additional initial external cost of $194,000 to co-
locate itself at four exchange data centers; \1065\ as well as $89,348
in costs that are common to all competing consolidators, as described
above.
---------------------------------------------------------------------------
\1061\ See supra Section V.D.1(a); supra note 664.
\1062\ See supra Section V.D.1(a).
\1063\ Id.
\1064\ See supra Section V.D.2(c); supra note 691.
\1065\ See supra Section V.D.2(c).
---------------------------------------------------------------------------
The Commission preliminarily estimates that the total direct costs
to each new entrant in the competing consolidator space would include
$5,126,167 in ongoing annual costs, as discussed above, and total one-
time costs of $2,396,542. The one-time costs are composed of costs of
$93,540 to complete the initial Form CC; \1066\ costs of $50 to obtain
digital IDs for the purposes of signing the initial Form CC; \1067\
costs of $5,604 to file two amendments to Form CC; \1068\ labor costs
of $1.175 MM,\1069\ external costs of $825,000 to build its systems to
comply with Rules 614(d)(1)-(d)(4), external costs of $14,000 to
purchase market data from the SROs, an additional initial external cost
of $194,000 to co-locate itself at four exchange data centers; \1070\
as well as $89,348 in costs that are common to all competing
consolidators, as described above.
---------------------------------------------------------------------------
\1066\ See supra Section V.D.1(a); supra note 664.
\1067\ See supra Section V.D.1(a).
\1068\ Id.
\1069\ See supra Sections V.D.2(d), V.D.2(e); supra notes 698,
705.
\1070\ See supra Sections V.D.2(d), V.D.2(e).
---------------------------------------------------------------------------
The Commission preliminarily estimates that the total direct costs
to each SRO that would decide to register as a competing consolidator
would include $5,120,398 in ongoing annual costs, as discussed above,
and total one-time costs of $2,297,348. The one-time costs are composed
of labor costs of $1.18 MM; \1071\ external costs of $825,000 to build
systems to comply with Rules 614(d)(1)-(d)(4), external costs of
$14,000 to purchase market data from the SROs, an additional initial
external cost of $194,000 to co-locate itself at four exchange data
centers,\1072\ as well as $89,348 in costs that are common to all
competing consolidators, as described above.
---------------------------------------------------------------------------
\1071\ See supra Sections V.D.2(d), V.D.2(e); supra notes 698,
705.
\1072\ See supra Sections V.D.2(d), V.D.2(e).
---------------------------------------------------------------------------
Separately, the Commission preliminarily estimates that the total
direct costs to each SRO would include $128,064 in ongoing annual
costs, and total one-time costs of $246,005. The ongoing annual costs
are composed of costs to collect the information necessary to generate
proposed consolidated market data required by proposed Rule
603(b).\1073\ The total one-time direct costs include up to $175,140 to
prepare an amendment to the effective national market system plan for
NMS stocks,\1074\ and labor costs of $70,865 of legal, compliance,
information technology, and business operations personnel to collect
the information necessary to generate consolidated market data as
required by proposed Rule 603(b).\1075\
---------------------------------------------------------------------------
\1073\ See supra Section V.D.2(f).
\1074\ Half of these costs, or $87,570, would be incurred to
comply with the timestamps required by the proposed rule, including
a review and any applicable change of the respondent's technical
systems and rules. A quarter of these costs, or $43,785, would be
incurred to compose the form of annual report on competing
consolidator performance. Additionally, $8,340 would be incurred to
compile and confirm the primary listing exchange for each NMS stock.
See supra Section V.D.5; supra note 734.
\1075\ See supra Section V.D.6; supra note 737.
---------------------------------------------------------------------------
The Commission preliminarily believes that the proposed amendments
that introduce a decentralized consolidation model are likely to have
indirect costs to existing exclusive SIPs, some market participants,
and investors. The Commission preliminarily believes that the proposed
amendments may impose a substantial cost for existing exclusive SIPs in
terms of loss of business because exclusive SIPs would no longer be
exclusive consolidators and disseminators of consolidated market data,
and at least one of the exclusive SIPs--Nasdaq UTP--would no longer be
paid out of the NMS plan for its processing costs.\1076\ The Commission
preliminarily believes that this loss of business would be mitigated by
the opportunity for the exclusive SIPs to become competing
consolidators. If exclusive SIPs decide
[[Page 16845]]
to become competing consolidators, they would compete for business with
each other and with other competing consolidators. This competition may
lead to revenue that is lower than their current revenue. This
potential decrease in revenue would represent a transfer of resources
to other competing consolidators and to market participants potentially
increasing social welfare. On the other hand, the exclusive SIPs have
the benefit of having been in this business for a long time. The
exclusive SIPs have significant connectivity to market participants and
vendors and can leverage their existing customer base and established
relationships with vendors and purchasers at firms. If the exclusive
SIPs decide to become competing consolidators, their experience with
this market may give them a competitive advantage and help mitigate
their potential revenue losses.
---------------------------------------------------------------------------
\1076\ This does not apply to CTA/CQ Plan that, as discussed
above, is paid differently. See supra Section VI.B.2(c).
---------------------------------------------------------------------------
Some market participants may also incur indirect costs as a result
of the introduction of the decentralized consolidation model. First, as
discussed above,\1077\ the price that some market participants would
pay for proposed consolidated market data may be higher than today's
price for consolidated market data, holding data content constant.
These market participants are likely interested in the current scope of
SIP data, and, therefore, may have to pay a higher price for expanded
data content that they are not interested in.
---------------------------------------------------------------------------
\1077\ See supra Section VI.C.2(b).
---------------------------------------------------------------------------
Second, the Commission preliminarily believes that there would be
an implementation cost for market participants to switch from using
current exclusive SIP providers or proprietary data feeds to using
competing consolidators. This cost is likely to vary among types of
market participants; for instance, existing purchasers of proprietary
DOB data products are likely to assume limited additional costs while
new customers of proposed consolidated market data from competing
consolidators would need, for example, to establish new connectivity
and integrate a larger set of data into their operations. This
implementation cost would include administrative costs for subscribing
to a new provider of the data, as well as any infrastructure
investments that may be needed to handle the data as delivered by the
competing consolidator. The Commission is uncertain about the size of
these costs but notes that these costs and the magnitude of their
effect may vary by market participant.
Additionally, one of the current exclusive SIPs, SIAC, processes
and disseminates the academic TAQ dataset. If SIAC discontinues its SIP
business, there may be interruptions to the availability of this data,
which would create a cost for both the academic community and investors
that otherwise benefit from regulators' use of this dataset. Other data
vendors also provide comprehensive historical data products that may
become more readily available from competing consolidators.\1078\ The
Commission is unable to quantify the incremental social welfare cost of
the interruption of availability of the TAQ dataset and invites
comments on this issue.
---------------------------------------------------------------------------
\1078\ See, e.g., MayStreet, Market Data, available at http://maystreet.com/products/market-data/ (last accessed Jan. 2, 2020).
---------------------------------------------------------------------------
Finally, the Commission preliminarily believes that the
decentralized consolidation model may result in multiple NBBO quotes
observed by different market participants due to different aggregation
methods used by competing consolidators. As discussed above,\1079\
currently market participants may already observe multiple NBBO quotes.
Therefore, the Commission preliminarily believes that the decentralized
consolidation model would result in no meaningful difference in
practice with respect to the existence of multiple NBBOs.
---------------------------------------------------------------------------
\1079\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------
The proposed amendments would impose a cost for SROs from losing
SIP fees. However, the Commission preliminarily believes that this loss
of fees would be offset by the data content and access fees paid to
SROs by competing consolidators.
(e) Economic Effects of Competing Consolidators Being Subject to
Regulation Systems Compliance and Integrity
The proposed rule amends Rule 1000 of Regulation SCI by expanding
the definition of ``SCI entities'' to include ``competing
consolidators.'' \1080\ Under the proposed rule, competing
consolidators would be subject to the standard requirements of
Regulation SCI (i.e., requirements for SCI systems that are not
critical SCI systems).\1081\ The Commission preliminarily believes that
expanding Regulation SCI to include competing consolidators would help
prevent market disruptions due to one or more competing consolidators'
systems issues and reduce the severity and duration of any effects that
may result if a systems issue were to occur for a competing
consolidator. But expanding Regulation SCI to include competing
consolidators would also impose costs on various entities, most
significantly on competing consolidators. Competing consolidators would
incur a number of direct and indirect compliance costs, such as initial
and on-going paperwork burdens as well as competing consolidators'
potential switching costs to find vendors that can satisfy the
Regulation SCI requirements. Additionally, Regulation SCI would impose
some indirect costs on other market participants because of their
specific business relationships with competing consolidators. For
example, third-party vendors employed by competing consolidators to
provide services used in their SCI systems would incur Regulation SCI
compliance costs similar to those incurred by competing consolidators.
---------------------------------------------------------------------------
\1080\ See supra Section IV.B.2(f) and note 557 and accompanying
text.
\1081\ See supra Section IV.B.2(f) and note 563 and accompanying
text.
---------------------------------------------------------------------------
(i) Benefits To Expanding Regulation SCI To Include Competing
Consolidators
Currently, the exclusive SIPs are SCI entities and the benefits
discussed in Regulation SCI already apply to them and to market
participants.\1082\ Under the proposed amendments, competing
consolidators would also be considered SCI entities and the benefits of
Regulation SCI would apply to them and would continue to apply to
market participants, i.e., maintain the status quo, if the exclusive
SIPs cease operating as exclusive plan processors. This section
discusses the benefits that would apply to competing consolidators and
would continue to apply to market participants from adding competing
consolidators to the list of SCI entities.\1083\
---------------------------------------------------------------------------
\1082\ See Regulation SCI Adopting Release, supra note 28, at
72404.
\1083\ More specifically, the benefits discussed in this section
are not measuring a change from the baseline but are discussing the
benefits that would continue to apply from including competing
consolidators in the list of SCI entities.
---------------------------------------------------------------------------
The Commission preliminarily believes that at least three benefits
would continue to apply by expanding Regulation SCI to include
competing consolidators.\1084\ First, imposing the requirements of
Regulation SCI on competing consolidators would help
[[Page 16846]]
prevent market disruptions due to one or more competing consolidators'
systems issues. Second, it would help reduce the severity and duration
of any effects that may result if a systems issue were to occur for one
of these competing consolidators, which could also help prevent
potential catastrophic events that might start out as a minor systems
problem but then quickly spread across the national market system,
potentially causing damage to market participants, including investors.
Third, expanding the Regulation SCI framework would help ensure more
effective Commission oversight of competing consolidators' systems.
---------------------------------------------------------------------------
\1084\ As discussed in detail above, the Commission
preliminarily believes that a number of entities who would become
competing consolidators are already subject to Regulation SCI. The
Commission preliminarily believes that many of the benefits
described below would not apply to these entities, because they
already have systems that meet the requirements for Regulation SCI.
Instead, the Commission preliminarily believes that many of the
benefits from extending Regulation SCI to include competing
consolidators would come from new entities who become competing
consolidators who are not currently subject to Regulation SCI. See
supra Section V.G.
---------------------------------------------------------------------------
The Commission preliminarily believes that adding competing
consolidators to the list of SCI entities would help prevent market
disruptions by strengthening the infrastructure and improving the
resiliency of the systems of new competing consolidators who are not
currently SCI entities. The proposed amendments to Regulation SCI would
help new competing consolidators who are not currently SCI entities
establish robust systems that are less likely to experience a system
disruption by requiring these competing consolidators to establish,
maintain and enforce written policies and procedures reasonably
designed to ensure that their SCI systems have levels of capacity,
integrity, resiliency, availability, and security, adequate to maintain
the SCI entity's operational capability and promote the maintenance of
fair and orderly markets.\1085\ The Commission preliminarily believes
that some potential new competing consolidators may already have
policies and procedures in place to maintain and test critical systems.
However, the Commission preliminarily believes that the requirements of
Regulation SCI would strengthen these policies and procedures, which
would help improve the robustness of critical systems.
---------------------------------------------------------------------------
\1085\ See supra Section IV.B.2(f).
---------------------------------------------------------------------------
The Commission preliminarily believes that complying with the
provisions of Regulation SCI would help reduce the severity and
duration of any effects that may result if a systems issue were to
occur for one of the new competing consolidators who are not currently
SCI entities. For example, Rule 1002(a), which requires an SCI entity
to take corrective action if an SCI event occurs, could reduce the
length of systems disruptions, systems compliance issues, and systems
intrusions, and thus reduce the negative effects of those interruptions
on the competing consolidator and market participants. Additionally,
each SCI entity must establish, maintain and enforce business
continuity and disaster recovery plans that include maintaining backup
and recovery capabilities sufficiently resilient and geographically
diverse and that are reasonably designed to achieve next business day
resumption of trading and two-hour resumption of critical SCI systems
following a wide-scale disruption. These plans would help competing
consolidators restore their systems more quickly in the event of a
disruption.
The Commission also preliminarily believes that the requirement for
competing consolidators to establish procedures to disseminate
information about SCI events to responsible SCI personnel, competing
consolidator subscribers, and the Commission would help reduce the
duration and severity of any system distributions that do occur for one
of the new competing consolidators who are not currently SCI entities.
The procedures would help these competing consolidators quickly provide
the affected parties with critical information in the event that it
experiences a system disruption. This could allow the affected parties
to respond more quickly and more appropriately to the incident, which
could help shorten the duration and reduce the effects of a system
event. This could also potentially help prevent an event that might
start out as a minor systems issue from becoming a catastrophic problem
that quickly spreads across the national market system, potentially
causing damage to market participants, including investors.
Additionally, the Commission believes that the requirement for a
competing consolidator to conduct testing of its business continuity
and disaster recovery plans with its designated participants and other
industry SCI entities would help detect and improve the coordination of
responses to system issues that could affect multiple market
participants in the NMS stock market. This testing should help prevent
these system disruptions from occurring and help reduce the severity of
their effects, if they do occur.
The Commission preliminarily believes expanding Regulation SCI to
include competing consolidators would help ensure more effective
Commission oversight of new competing consolidators who are not
currently SCI entities. As SCI entities, these competing consolidators
would have to immediately notify the Commission upon the occurrence of
an SCI event (unless de minimis) and, each quarter, would have to
inform the Commission of any planned material changes to its SCI
systems and the security of indirect SCI systems, as well as any SCI
events that had a de minimis impact on its operations or on market
participants. Each year these competing consolidators would also have
to provide the Commission with an SCI review of their compliance with
Regulation SCI. This information would help ensure more effective
Commission oversight by enhancing the Commission's review of these
competing consolidators and helping make the Commission aware of
potential areas of weakness in the competing consolidator's systems
that may pose risk to the entity or the market as a whole, as well as
areas of non-compliance with Regulation SCI.
Additionally, the Commission preliminarily believes that the
exclusive SIPs could realize an incremental benefit relative to the
baseline from lower SCI-related costs. Because the Commission assumes
that enough competing consolidators would enter the market to provide
for multiple viable sources of consolidated market data,\1086\ the
Commission preliminarily believes that if the exclusive SIPs become
consolidators then they would be considered SCI entities subject to the
standard obligations of Regulation SCI, rather than subject to the
additional costs associated with being subject to the heightened
requirements applicable to ``critical SCI systems.''
---------------------------------------------------------------------------
\1086\ See supra Section VI.C.2(a) for a discussion of this
assumption.
---------------------------------------------------------------------------
(ii) Costs of Expanding Regulation SCI To Include Competing
Consolidators
Competing consolidators would incur both paperwork and non-
paperwork related direct and indirect compliance costs as SCI entities.
Because Regulation SCI imposes some indirect requirements on other
market participants interacting with SCI entities (e.g., vendors
providing SCI systems to SCI entities), those market participants would
also incur indirect costs from competing consolidators being defined as
SCI entities.
The Commission preliminarily believes that the 2018 estimates of
initial paperwork burdens for new SCI entities and ongoing paperwork
burdens for all SCI entities under Regulation SCI are largely
applicable to potential entrants into the competing consolidator
business.\1087\ The 2018 PRA Extension includes estimates
distinguishing between new versus existing SCI entities. The Commission
preliminarily believes that, using the same new versus existing SCI
entity framework, the 12 estimated entrants into the competing
[[Page 16847]]
consolidator business could be divided into three groups: Entrants that
are existing SCI entities with experience in the consolidated market
data business (e.g., exclusive SIPs or exchanges or entities affiliated
with an exchange that currently operate an exclusive SIP); entrants
that are existing SCI entities but with no experience in the
consolidated market data business and needing to performing a new
function with new SCI systems (e.g., a national securities association
or national securities exchanges that do not currently operate an
exclusive SIP); and finally, entrants that are entirely new SCI
entities that are not currently subject to Regulation SCI (e.g., third-
party aggregators that are not currently subject to Regulation SCI). As
discussed above,\1088\ the Commission preliminarily believes that the
existing SCI entities in the first category would not have any initial
burden, whereas the existing SCI entities in the second category would
incur approximately 50% of the Commission's initial burden estimates
for an entirely new SCI entity. Further, the 2018 ongoing burden
estimates for existing SCI entities in both of these categories would
continue to be applicable. Similarly, the Commission preliminarily
believes that new SCI entities in the third category would have the
same estimated initial paperwork burdens as those estimated for new SCI
entities and the same ongoing paperwork burdens as all other SCI
entities.
---------------------------------------------------------------------------
\1087\ See supra note 740.
\1088\ See supra Section V.G.
---------------------------------------------------------------------------
As SCI entities, competing consolidators would also incur non-
paperwork related direct compliance costs. In 2014, the Regulation SCI
adopting release estimated that an SCI entity would incur an initial
cost of between approximately $320,000 and $2.4 million.\1089\
Additionally, an SCI entity would incur an annual ongoing cost of
between approximately $213,600 and $1.6 million.\1090\ The Commission
preliminarily believes that similar to the paperwork burden estimates,
these non-paperwork related costs are also largely applicable to
competing consolidators. But the Commission is uncertain about the
actual level of costs competing consolidators would incur, because
these costs could differ based on the type of potential entrant into
the competing consolidator business. The Commission preliminarily
believes that there are two reasons why competing consolidators' costs
are likely to be on the lower end of these cost estimates.
---------------------------------------------------------------------------
\1089\ Regulation SCI Adopting Release, supra note 28, at notes
1943-1944.
\1090\ Id. at notes 1945-1946.
---------------------------------------------------------------------------
First, these cost estimates include costs of having part of an SCI
entity's system be a ``critical SCI system,'' and therefore be subject
to certain heightened resilience and information dissemination
provisions of Regulation SCI. For instance, as discussed above,\1091\
the existing exclusive SIPs currently represent single points of
failure and are subject to heightened requirements for ``critical SCI
systems.'' Under the proposed rule, competing consolidators' systems
are not included within the scope of ``critical SCI systems.'' The
Commission preliminarily believes that if competing consolidators'
systems are subject to the standard requirements of Regulation SCI,
they would not incur compliance costs of the heightened requirements
for ``critical SCI systems.'' To the extent that the incremental costs
of being subject to the heightened requirements for ``critical SCI
systems'' versus the standard requirements for ``SCI systems'' is
small, these cost savings could be low.
---------------------------------------------------------------------------
\1091\ See supra Section IV.B.2(f).
---------------------------------------------------------------------------
Second, among all of the SCI entities, competing consolidators have
relatively simpler systems and fewer functions, and thus would have
compliance costs closer to the lower end of the above cost estimates.
The above cost estimates provide an average for all SCI entities,
without distinguishing between different categories of SCI entities.
However, the Regulation SCI adopting release explains that compliance
costs would depend on the complexity of SCI entities' systems and they
would be higher for SCI entities with more complex systems.\1092\
Competing consolidators would likely have simpler systems and fewer
functions relative to some of the other SCI entities, such as
exchanges. As a result, the Commission preliminarily believes that
competing consolidators' compliance costs are likely to be on the lower
end of the average cost estimates for all SCI entities.
---------------------------------------------------------------------------
\1092\ Regulation SCI Adopting Release, supra note 28, at 634.
---------------------------------------------------------------------------
Additionally, the Commission preliminarily believes that some of
competing consolidators' subscribers associated with the testing of
business continuity and disaster recovery plans would incur Regulation
SCI-related connectivity costs. Rule 1004 of Regulation SCI sets forth
the requirements for testing an SCI entity's business continuity and
disaster recovery plans with its designated members or
participants.\1093\ Competing consolidators and their designated
subscribers would be subject to these same costs. The Regulation SCI
adopting release estimated connectivity costs as part of these business
continuity and disaster recovery plans to be approximately $10,000 per
SCI entity member or participant.\1094\ The Commission preliminarily
believes that these connectivity cost estimates would also be
applicable to competing consolidators' designated subscribers.
---------------------------------------------------------------------------
\1093\ Id.; Rule 1004.
\1094\ Id. at note 2065.
---------------------------------------------------------------------------
The Commission preliminarily believes that competing consolidators
and various other market participants would incur certain indirect
costs related to compliance requirements for competing consolidators as
SCI entities.
The Commission preliminarily believes that the costs to comply with
Regulation SCI discussed above would also fall on third-party vendors
employed by competing consolidators to provide services used in their
SCI systems. Regulation SCI requires that any system provided by a
vendor to an SCI entity and used by that entity in its SCI system must
also comply with Regulation SCI requirements. The Commission
preliminarily believes that all costs discussed above for competing
consolidators to comply with Regulation SCI would also fall on third-
party vendors employed by competing consolidators in the course of
providing consolidated market data. Examples of such vendors may
include communications firms employed by competing consolidators to
transport data from exchanges to the competing consolidator's
aggregation servers at various data centers. If many third-party
vendors are employed by potential competing consolidators in their
consolidated market data business, the size of this cost could be
significant. The Commission invites comment on the issue.
Additionally, the Commission preliminarily believes there is the
potential for these costs to cause the vendors to end existing business
relationships with market participants who become competing
consolidators. It is possible that third-party vendors would not want
to incur the costs that competing consolidators may impose to assure
that the competing consolidator can comply with Regulation SCI
requirements, and as a result be unwilling to provide services to the
competing consolidator's consolidated market data business. To the
extent that this happens, competing consolidators would incur costs
from having to find new vendors, form a new business relationship, and
adapt their systems to the infrastructure of the new vendor.
[[Page 16848]]
Competing consolidators may also elect to perform the relevant
functions internally. To the extent that competing consolidators either
find new vendors or perform the functions internally, it would
represent an increased inefficiency in the market, since presumably the
current market data vendors are the most efficient means of performing
these functions.
The Commission preliminarily believes that the technology
supporting some of the services provided by vendors to current data
aggregators (notably communications, such as microwave transmission)
require significant expertise in order to be competitive and are
difficult to replicate. To the extent this is the case, and to the
extent that Regulation SCI requirements prevent competing consolidators
from using these vendors, the ability of competing consolidators to
provide consolidated market data in a manner that rivals current third-
party aggregation practices could be significantly reduced.
(f) Economic Effects of the Decentralized Consolidation Model
Pertaining to Self-Aggregators
As discussed above,\1095\ a number of market participants currently
purchase proprietary data products from the exchanges and consolidate
this data for their internal use. To permit self-aggregation under the
proposed decentralized consolidation model, the Commission proposes to
define a self-aggregator as a broker or dealer that would receive
information from the exchanges necessary to generate consolidated
market data solely for internal use.\1096\
---------------------------------------------------------------------------
\1095\ See supra Section IV.B.2(e)(iii).
\1096\ Id.
---------------------------------------------------------------------------
Market participants that currently effectively self-aggregate and
that decide to become self-aggregators under the proposed decentralized
consolidation model will have two choices regarding the use of the
exchanges' proprietary data products. First, they may decide to limit
the use of exchange data to the creation of proposed consolidated
market data, in which case they would be charged for proposed
consolidated market data pursuant to the fee schedules of the effective
national market system plan(s) for NMS stocks. In this case, market
participants would likely benefit from lower data fees as compared to
current fees they pay for proprietary data and connectivity
products.\1097\
---------------------------------------------------------------------------
\1097\ See infra Section VI.C.4.
---------------------------------------------------------------------------
Second, they may decide they need data beyond the scope of proposed
consolidated market data, in which case they would be additionally
charged for the proprietary data and connectivity services pursuant to
the individual exchange fee schedules. In this case, the potential
price gain would be limited to the price decline for the portion of the
data corresponding to the proposed consolidated market data. The
Commission is uncertain about the extent of this effect.
Market participants that currently effectively act as self-
aggregators and that would choose to become self-aggregators under the
proposed decentralized consolidation model may incur some switching
costs, especially if the exchanges provide components of the
consolidated market data with feeds and connections other than what
these market participants currently use. However, since these market
participants already have the infrastructure to receive the proprietary
data products from the exchanges, the Commission expects these
switching costs to be minimal.
(g) Other Conforming Changes
The Commission is proposing conforming changes for some of the
previous Commission or SRO rules and regulations, which themselves can
have economic effects. This section discusses the conforming changes
and corresponding economic effects.
(i) Amendments to Regulation SHO
As described above in section III.D.1, the Commission is proposing
amendments to Regulation SHO to adjust the process of determining
whether a Short Sale Circuit Breaker has been triggered and
disseminating such trigger information. First, the primary listing
exchange would decide how to obtain the consolidated data necessary to
determine whether a Short Sale Circuit Breaker should be triggered.
Second, the primary listing exchange would be responsible for notifying
competing consolidators and self-aggregators rather than a single plan
processor. The first change allows the primary listing exchange to
select the most cost-effective means of fulfilling its
responsibilities. The second change could entail some compliance costs
for competing consolidators but is necessary to ensure that all
competing consolidators are on a level playing field. The resulting
compliance costs for exchanges are included in the Commission's general
compliance estimate above.\1098\ The resulting compliance costs for
competing consolidators are included in the Commission's estimate of
the general costs to becoming a competing consolidator above.\1099\
---------------------------------------------------------------------------
\1098\ See supra Section V.D.6.
\1099\ See supra Section V.B.2.
---------------------------------------------------------------------------
In addition, the Commission is proposing to define ``primary
listing exchange'' in Regulation NMS and to amend the definition of
``listing market'' in Regulation SHO to refer to the proposed
definition of primary listing exchange. The Commission preliminarily
believes that this change would have no direct economic effects, other
than harmonizing Regulation SHO with Regulation NMS.
(ii) Effective Changes to Responsibilities Under the Limit Up Limit
Down Plan and Market Wide Circuit Breaker Rules
The proposed definition of ``regulatory data'' requires the primary
listing exchange to be the entity responsible for monitoring,
calculating, and disseminating certain information necessary to
implement the LULD Plan and the MWCB rules. These functions are
currently the responsibility of a single exclusive SIP, however, the
Commission is proposing that the primary listing exchanges be
responsible for disseminating information regarding Price Bands and
Limit States and the primary listing exchange with the largest portion
of S&P 500 Index stocks be responsible for determining whether an MWCB
has been triggered. While the Commission preliminarily believes that
these amendments could result in implementation and ongoing costs for
primary listing markets that currently do not operate a SIP, these
amendments ensure a single set of Price Bands and a consistent message
that MWCBs have triggered. The Commission preliminarily believes that
the additional cost of calculating the information necessary to
implement the LULD Plan and WMCB rules would be minimal. The cost
imposed on these primary listing markets is included in the general
compliance cost the Commission has estimated for SROs above.\1100\
---------------------------------------------------------------------------
\1100\ See id.
---------------------------------------------------------------------------
(h) Request for Comments
The Commission requests comments on its analysis of the economic
effects pertaining to the proposed decentralized consolidation model.
In particular, the Commission solicits comment on the following:
228. Do you agree with the reasonableness of the Commission's
assumption that the proposed amendments would lead to multiple
competing consolidators participating in
[[Page 16849]]
the consolidated market data business and distributing data to market
participants? Why or why not? Please explain in detail.
229. Are you an organization that would want to provide the
competing consolidator service described? If so, please include an
estimate of how much effort would be required for you to begin
providing this service in the market. If you are willing to provide
price estimates, please do so as well.
230. What factors are likely to influence the decision of various
market participants to become competing consolidators? How large would
be the barriers to entry to becoming a competing consolidator? Would
there be any sources of barriers to entry other than building the
technological infrastructure, filing Form CC, and complying with the
other regulatory requirements associated with being a competing
consolidator?
231. Which market participants would be likely to become competing
consolidators? Are the current exclusive SIPs likely to become
competing consolidators? Why or why not? Would existing market
aggregation firms become competing consolidators? Why or why not? Would
any other types of firms likely become competing consolidators? Why or
why not?
232. How would the Commission's assessment of the economic effects
of the rule be affected by too few competing consolidators? Please be
specific.
233. To what extent would the adoption of the various proposals in
Section III independently respond to some or all of the issues the
proposed competing consolidator model is intended to address?
234. Do you agree with the Commission's assessment of the potential
effect of the proposal on data fees? In particular, do commenters agree
with the Commission's conclusion that the proposal could reduce overall
data fees? What is the likely effect of the proposal on each of the
components of the overall data fees, fees for consolidated market data,
fees for proprietary market data, and fees for connectivity? What are
some of the important factors that could result in fee increases and
decreases? Please explain in detail.
235. The Commission requests that commenters provide any insights
or data they may have as to potential changes in connectivity fees and
the effect of these new connectivity fees on the proposed competing
consolidator business.
236. Do you agree that there would be three potential benefits from
the increased competition provided by the decentralized consolidation
model: Efficiency gains in the delivery of consolidated market data,
improvements in technological innovation in consolidated market data,
and reductions in latency? Why or why not? If not, which benefits do
you disagree with? Please explain.
237. What are the benefits of expanding Regulation SCI to define
competing consolidators as ``SCI entities''? What are the costs of
expanding Regulation SCI to define competing consolidators as ``SCI
entities''? Please explain and provide cost estimates, if available.
238. The Commission requests that commenters provide relevant data
and analysis to assist in analyzing how the total price of proposed
consolidated market data (including the data fee paid to the operating
committee(s) of the effective national market system plan(s) for NMS
stocks and service fees paid to competing consolidators) in the
decentralized consolidation model would compare to current pricing of
SIP data. More specifically, how would the aggregate fees paid by
various types of market participants under the decentralized
consolidation model likely compare to the aggregate fees paid by the
same types of market participants for the same data today, assuming the
content of the data consumed by market participants remains constant
but the providers of that data change? Would any market participant
types be likely to expand the data they purchase if such data is
included in the definition of consolidated market data? Please explain.
How would the aggregate fees paid by such market participants under the
decentralized consolidation model likely compare to the aggregate fees
paid by them today, assuming such market participants expand the data
they purchase? Please quantify if possible.
239. Do you agree with the Commission's assessment of the costs
incurred by potential competing consolidators as a result of the
proposal? Specifically, do you agree that potential competing
consolidators would incur initial costs of $0.6 million to $3.9 million
and ongoing costs of $2 million and $2.6 million? Why or why not?
Please provide revised cost estimates, if possible. How would these
costs vary across the types of entities likely to become competing
consolidators? What costs would be common across competing
consolidators?
240. Do you agree with the Commission's assessment of the costs to
each SRO of amending effective national market system plan(s) for NMS
stocks to implement the proposed decentralized consolidation model? Why
or why not? Please explain and provide alternative cost estimates, if
possible.
241. Would existing SIPs and exchanges lose business as a result of
the proposed decentralized consolidation model? If so, what is the
nature and potential magnitude of the business they would lose? Could
any exclusive SIPs or exchanges gain business as a result of the
decentralized consolidation model? Please explain.
242. Would the proposed decentralized consolidation model result in
more NBBOs than could be viewed today? If so, would this increase the
complexity of our markets? Why or why not? Please describe any economic
effects resulting from an increase in multiple NBBOs.
243. Do you agree with the Commission's assessment of the costs to
data users of potentially switching from purchasing market data from
exclusive SIPs and/or exchanges to purchasing market data from
competing consolidators? Why or why not? Please explain. Do you agree
that these costs are likely to vary among types of market participants?
244. Would the proposed amendments result in the interruption of
data available for research by the academic community and investors,
such as TAQ data? If so, the Commission requests that commenters
provide relevant data and analysis to assist us in determining the
incremental social welfare cost of such interruption of data to the
academic community and investors.
245. How costly would be the proposed changes to the entities
responsible for requirements of Regulation SHO, LULD and MWCB for
listing exchanges? What is the magnitude of such costs that derive from
implementing processes to continuously calculate and track data metrics
for compliance with the proposed changes? What is the magnitude of such
costs that derive from notifying the competing consolidators and others
of price bands and triggers? Does the magnitude of such costs depend on
the number of competing consolidators?
246. Do you agree with the Commission's assessment of the benefits
of subjecting competing consolidators to Regulation SCI requirements?
Why or why not?
247. Do you agree with the Commission's assessment of the costs of
subjecting competing consolidators to Regulation SCI requirements? Why
or why not? Do you agree with the Commission's estimates of the costs
involved? Please explain in detail.
[[Page 16850]]
248. Are geographically diverse backup systems a standard practice
among firms likely to become competing consolidators today? What effect
does the answer to this question have on the likely cost for competing
consolidators to maintain geographically diverse backup systems?
249. Do you agree with the Commission's assessment on the impact of
Regulation SCI requirements on third-party vendors employed by
competing consolidators? Why or why not? To what extent do potential
competing consolidators contract with third-party vendors for systems
that would meet the definition of an SCI system? What is the magnitude
of costs to third-party vendors who operate these systems to make sure
these systems meet the requirements of Regulation SCI? What effect will
this impact have on the ability of competing consolidators to provide
reliable data products? Please explain and provide estimates, if
possible.
250. Do you believe that the amendments to Regulation SCI could
reduce innovation among new competing consolidators? Please explain. If
so, which provisions of Regulation SCI affect innovation the most and
how? Please explain.
251. How significant is the barrier to entry provided by Regulation
SCI requirements on potential competing consolidators? Do you believe
this will have a significant impact on the number of entities who enter
the competing consolidator business? Why or why not?
3. Economic Effects of Form CC
As discussed above in Section IV.B, the proposed amendments would
not let a person, other than an SRO, act as a competing consolidator,
i.e., generating proposed consolidated market data for dissemination to
non-affiliated persons, unless that person files with the Commission an
initial Form CC and the initial Form CC has become effective. The
proposed amendments would require the public disclosure of Form CC,
which requires a number of disclosures about a competing consolidator's
services and fees and operations, and metrics related to the
performance of competing consolidators. As a result, the proposed
amendments would provide transparency for investors who might purchase
the products and services of a competing consolidator. The Commission
preliminarily believes that the information provided in Form CC and the
resulting transparency would help market participants make better-
informed decisions about which competing consolidator to subscribe to
in order to achieve their trading or investment objectives.
Additionally, the Commission preliminarily believes that the
process for the Commission to declare an initial Form CC ineffective
would improve the quality of information the Commission receives from
competing consolidators, which would allow the Commission to better
protect investors from potentially incomprehensible or incomplete
disclosures that would misinform market participants about the
operations and services of a competing consolidator.
(a) Public Disclosure of Form CC and Other Competing Consolidator
Information
The proposed Form CC would require competing consolidators to
publicly disclose four sets of information on the Commission
website.\1101\ First, proposed Form CC would require competing
consolidators to disclose general information, along with contact
information. Second, proposed Form CC would require competing
consolidators to disclose information regarding their business
organizations. Third, proposed Form CC would require competing
consolidators to disclose information regarding their operational
capabilities. Fourth, proposed Form CC would require competing
consolidators to disclose information regarding their services and
fees. The proposed rule also includes requirements for amendments under
defined circumstances and a notice of cessation of operations at least
30 business days before the date the competing consolidator ceases to
operate as a competing consolidator. Proposed Form CC, any amendments
to it, and any notices of cessation would be made public via posting on
the Commission's website. The proposed rule also has a disclosure
requirement about competing consolidators' performance metrics on their
own websites. Additionally, the proposed rule would require competing
consolidators to disclose operational information on their websites
related to vendor alerts, data quality and systems issues, and clock
drift in the clocks they use to create timestamps. Generally, these
requirements promote transparency and competition among competing
consolidators and effective regulatory oversight within a streamlined
approach to avoid significant barriers to entry.
---------------------------------------------------------------------------
\1101\ See supra Section IV.B.2(e).
---------------------------------------------------------------------------
The business organization disclosures would give market
participants a window into the ownership as well as the organizational
structures of competing consolidators. The Commission preliminarily
believes that this information would help market participants make
better-informed decisions about which competing consolidator to
subscribe to as well as how to avoid any potential conflicts of
interest. For example, if a broker-dealer is considering subscribing to
a competing consolidator for consolidated data and any other potential
additional services such as analytics, they may search for a competing
consolidator that is not owned by a competitor or an affiliate of a
competitor in the broker-dealer space. Purchases of data and additional
market intelligence services between two competitors could potentially
create conflicts of interest. Thus, the required disclosure of a
competing consolidator's business organization--which would, for
example, clarify the ownership information--would provide transparency
on its potential conflicts of interest.
The information on operational capabilities would provide market
participants detailed information about each competing consolidator's
product portfolio and technical capabilities. Since market participants
vary in their data and technical capability needs, information on
competing consolidators operational capabilities would allow the market
participants to make better-informed purchase decision. For example,
market participants who trade frequently and who need robust backup
systems might choose competing consolidators with those capabilities.
Whereas other market participants who have longer term investment
strategies with potentially less frequent trades might prefer competing
consolidators with less aggressive backup systems. Proposed Form CC
disclosures would facilitate a better match between market
participants' needs and competing consolidators' offerings, and would
also help to ensure consistent disclosures between competing
consolidators.
With the consistent disclosures on services and fees, market
participants could compare and contrast the various services provided
and the corresponding fees asked by competing consolidators. Market
participants could then make better purchase decisions, based on their
individual needs. Additionally, the service and fee transparency
resulting from these disclosures would promote competition in similar
products and/or services across different competing consolidators,
which could result in similar prices, and would help to protect market
participants from unfair and unreasonable prices.
[[Page 16851]]
The Commission preliminarily believes that the proposed requirement
for competing consolidators to amend Form CC prior to implementing
material changes to their pricing, products, or connectivity options
would provide transparency into changes in the operations of competing
consolidators and better inform subscribers and other market
participants about significant changes in the fees and services offered
by a competing consolidator. This would allow subscribers to a
competing consolidator to better evaluate if it would continue to serve
their business needs. Additionally, it would facilitate effective
oversight by the Commission.
Similarly, the Commission preliminarily believes that the
requirement for a notice of cessation would also benefit subscribers to
the competing consolidator, because it would give them advanced notice
before the competing consolidator ceases to operate. Thus those
subscribers would have more time to find another competing consolidator
to supply them with consolidated market data.
The fact that the information on Form CC would be in a single
location instead of dispersed across the competing consolidators' own
websites would aid market participants by introducing only minimal
search costs when evaluating and comparing potential competing
consolidators to decide which one best suits their business interests.
As discussed above,\1102\ the Commission preliminarily believes the
proposed rule would cause each competing consolidator, except for SROs,
to incur an approximately $93,540 in implementation compliance cost in
order to collect the information required to fill out and file an
initial Form CC as well as $5,744 in ongoing costs in order to file
amendments to an effective Form CC. The Commission believes these
requirements are streamlined to include only what is necessary to
achieve the benefits discussed above without creating significant
barriers to entry that would discourage entities from becoming
competing consolidators.
---------------------------------------------------------------------------
\1102\ See supra Sections V.D.1(a), VI.C.2(d); supra note 664.
---------------------------------------------------------------------------
Competing consolidators would also experience implementation costs
because initial Form CC and any amendments to Form CC would be required
to be filed electronically with the Commission. The Commission
preliminarily believes that requiring Form CC to be filed
electronically would reduce filing costs compared to requiring the
competing consolidator to file paper forms.
To file a form CC, competing consolidators would need to access the
Commission's EFFS system. Each competing consolidator would have to
submit an application and register each individual who would access the
EFFS system on behalf of the competing consolidator. The Commission
believes that each competing consolidator would initially designate two
individuals to access the EFFS system, with each application taking
0.15 hours for a total of 0.3 hours per competing consolidator. On an
ongoing basis, each competing consolidator will add one individual to
access the EFFS system for amendments, adding 0.15 hours per competing
consolidator. To make a submission into the EFFS system, the competing
consolidator must download a proprietary viewer; however, the
Commission would cover the cost of the license for all competing
consolidators, as it currently does for other filers that use the EFFS
system.
Because the EFFS system is not available to the public, when the
Commission makes an effective Form CC available to the public, the
Commission will transform the data into an unstructured format, meaning
that it is not machine-readable. Market participants that would use the
Form CC data to evaluate and compare competing consolidators would bear
the costs of locating, comparing, and evaluating the information on the
Commission's website and take steps to put the information ``side by
side'' for comparison purposes.
The Commission preliminarily believes that the public disclosure of
performance metrics and additional information would introduce
transparency to the operations of competing consolidators. These
metrics would allow subscribers and potential subscribers to better
evaluate the performance and current and future capabilities of a
competing consolidator. Market participants, based on their individual
needs, could review competing consolidators' performance statistics and
choose ones that would best serve their trading needs. While the
requirements to post the monthly performance metrics and operational
information on websites would introduce transparency, it would not
completely eliminate costs incurred when market participants want to
compare competing consolidators because collecting the information
would involve market participants expending some resources to go to
each competing consolidator's website.
Competing consolidators would also incur implementation and ongoing
compliance costs in order to setup and maintain systems required to
calculate and produce the information for the performance metrics as
well as other information the competing consolidator would be required
to post to its website.
Each month, competing consolidators would be required to post the
monthly performance metrics and operational information on their own
websites. Excluding the cost of preparing the information, the
Commission estimates an average competing consolidator would incur a
one-time cost of $2,651 (6 hours (for website development) x $308.50
per hour (blended rate for a senior systems analyst ($285) and senior
programmer ($332)) + $800 for an external website developer to develop
the web page = $2,651) for posting the required information to a
website, and would incur an ongoing annual cost of up to $3,702 (1 hour
(for website updates) x $308.50 per hour (blended rate for a senior
systems analyst ($285) and senior programmer ($332)) x 12 monthly
postings = $3,702) to update the relevant web page each month. Because
the monthly performance metrics and operational information may be
posted in any format the competing consolidator finds most convenient,
market participants that would use the data to evaluate and compare
competing consolidators would bear the costs of locating, comparing,
and evaluating the information on each competing consolidator's
website. The Commission preliminarily believes that the operational
information that competing consolidators would be required to publicly
disclose on their websites would create a mechanism for market
participants to hold competing consolidators accountable for any
systems issues they may experience. One strong accountability mechanism
market participants have is their purchasing power. The disclosure
requirements would alert market participants to any system breaches or
any data quality or systems issues a competing consolidator
experiences. Market participants could hold competing consolidators
accountable by abandoning competing consolidators that repeatedly
experience system issues and gravitating toward competing consolidators
that demonstrate more reliable systems through their disclosures. This
demand shift could cause competing consolidators with less reliable
systems to exit the market.
In addition to the requirements of Regulation SCI promoting
competing consolidators to develop resilient
[[Page 16852]]
systems,\1103\ the requirement that competing consolidators publicly
disclose information on systems issues as well as performance metrics
regarding system availability could also encourage competing
consolidators to make investments that would ensure the resiliency of
their systems. These disclosures would help market participants
determine which competing consolidators have more reliable systems.
Competing consolidators who display more reliable systems with greater
system availability would attract more subscribers. This should
incentivize competing consolidators to invest in better backup systems
or other technology that would improve the resiliency of their systems
and increase their system uptime.
---------------------------------------------------------------------------
\1103\ See supra Section VI.C.2(e)(i).
---------------------------------------------------------------------------
The Commission preliminarily believes that information from the
disclosures in Form CC and the performance metrics and operational
information competing consolidators would provide on their websites
would promote effective regulatory oversight of competing consolidators
and increased investor protection by providing the Commission and
relevant SROs with information about competing consolidators. With this
information, the Commission and the SROs could identify competing
consolidators that are not properly complying with the proposed
amendments or parts of them. The Commission and SROs, then, could
utilize this information to help prioritize examinations and possibly
help identify potential issues.
The Commission preliminarily believes that the public disclosure of
the information in Form CC and the performance metrics and operational
information competing consolidators would provide on their websites
could also increase competition between competing consolidators and
also expose some competing consolidators to certain competitive
effects. If the public disclosures show that certain competing
consolidators have higher fees or poorer performance, it may result in
those competing consolidators losing subscribers and earning lower
revenues. Similarly, competing consolidators who display lower prices
or superior system performance may be able to attract more subscribers
and earn more revenue. The public disclosure of the fee and performance
information on the Commission and competing consolidator websites would
facilitate competing consolidator comparison and would also promote
competition. Greater competition between competing consolidators could
in turn incentivize competing consolidators to innovate--particularly
in terms of their technology--so that they can attract more
subscribers.\1104\
---------------------------------------------------------------------------
\1104\ See infra Section VI.D.2 (discussing the potential
effects of the proposal on competition).
---------------------------------------------------------------------------
(b) Commission Review and Process for Declaring Initial Form CC
Ineffective
The Commission preliminarily believes that the process of reviewing
an initial Form CC would allow the Commission to evaluate, among other
things, the completeness and comprehensibility of the competing
consolidators' disclosures and, if necessary, declare the Form CC
ineffective. To be a consolidated market data provider, a competing
consolidator is required to have a Form CC that has become effective
pursuant to proposed Rule 614(a)(1)(v). Thus, for competing
consolidators that submit low quality and potentially inaccurate data,
the Commission's review and declaration of their Form CC ineffective
could start an iterative cycle of increasingly better information
provision, until the competing consolidator can have an effective Form
CC. The Commission preliminarily believes that this public disclosure
and review process would improve the quality of information the
Commission receives from competing consolidators, which would allow the
Commission to better protect investors from potentially
incomprehensible or incomplete disclosures that would misinform market
participants about the operations of the competing consolidator.
Additionally, an entity cannot operate as a competing consolidator
without an effective Form CC. The Commission's review would be designed
to ensure that the competing consolidators serving the investors would
be the ones that meet the Commission's qualification requirements.
The Commission preliminarily believes that the filing requirements
of Form CC and the Commission review period could impose costs on
competing consolidators. The Commission preliminarily believes that
declaring a Form CC ineffective could impose costs on a competing
consolidator--such as delaying the start of operations while the
competing consolidator resubmits its Form CC--and could impose costs on
individual market participants and the overall market for competing
consolidators resulting from a potential reduction in competition.
However, competing consolidators and market participants would not
incur these costs unless the competing consolidator submitted a
deficient Form CC. Therefore, the Commission preliminarily believes
that a competing consolidator would be incentivized to submit Form CC
disclosures that are complete and comprehensive to avoid bearing the
costs of resubmitting a Form CC filing or of having its Form CC
declared ineffective.
The Commission recognizes that the registration process would
create uncertainty about whether the form would be declared
ineffective. This uncertainty could create a disincentive for entities
to become competing consolidators, which could potentially reduce
competition in the competing consolidator market.\1105\
---------------------------------------------------------------------------
\1105\ See infra Section VI.D.2 (discussing the potential
effects of the proposal on competition).
---------------------------------------------------------------------------
(c) Request for Comments
The Commission requests comments on its analysis of the economic
effects of proposed Form CC. In particular, the Commission solicits
comment on the following:
252. Do you agree that Form CC would help market participants make
better-informed decisions about which competing consolidators to
subscribe to in order to achieve their trading or investment
objectives? Why or why not?
253. Do you agree that the process for the Commission to declare an
initial Form CC ineffective would promote the quality of information
the Commission receives from competing consolidators? Do you agree that
the quality would affect the ability of the Commission to protect
investors? Why or why not?
254. Do you agree with the Commission's assessment of the costs of
Form CC? Please explain and provide cost estimates, if available.
255. Do you agree that filing initial Form CC and amendments to
Form CC electronically with the Commission through the EFFS system
would reduce filing costs and increase benefits compared to filing
paper forms? Please explain.
256. The Commission has provided cost estimates that competing
consolidators would incur for accessing and filing using the
Commission's EFFS system. Do you believe these cost estimates are
accurate? If not, please explain. Do you believe there are other costs
potential competing consolidators would incur related to using the EFFS
system that the Commission should consider?
257. Do you agree that the proposed performance metrics would
create operational transparency of competing consolidators and allow
subscribers and potential subscribers to evaluate and compare the
performance of competing
[[Page 16853]]
consolidators? Please explain. Do you agree that posting the monthly
performance metrics on the websites of the competing consolidators
would limit the ability to compare competing consolidators relative to
posting or filing the metrics in a central location? Please explain.
258. How costly would it be for competing consolidators to
calculate and post the performance metrics? Please explain and provide
cost estimates.
259. The Commission has provided cost estimates that competing
consolidators would incur for posting monthly statistics on their
websites. Do you believe these cost estimates are accurate? If not,
please explain. Do you believe there are other costs competing
consolidators would incur related to posting monthly statistics on
their websites that the Commission should consider? Please explain.
260. Do you agree with the Commission's assessment of the costs
imposed by the process for declaring an initial Form CC ineffective,
including the uncertainty it would create? Please explain.
4. Economic Effects From the Interaction of Changes to Core Data and
the Decentralized Consolidation Model
The Commission preliminarily believes that the proposed amendments
would have a number of economic effects that are only possible as a
result of a combination of the expanded content of core data and
latency reductions due to the introduction of the decentralized
consolidation model.\1106\ Specifically, the Commission preliminarily
believes that the combination of these factors would affect proprietary
data feed business; market participants who choose to engage in market
making, smart order routing, and other latency sensitive trading
businesses; the Consolidated Audit Trail; and data vendor business.
---------------------------------------------------------------------------
\1106\ See supra Section VI.C.2(c) (discussing the effect of the
decentralized consolidation model on consolidated market data
latency).
---------------------------------------------------------------------------
(a) Economic Effects on the Proprietary Data Feed Business
The Commission preliminarily believes that the expanded content of
core data and latency reduction due the introduction of the
decentralized consolidation model could make proposed consolidated
market data a reasonable alternative to exchange proprietary data feeds
for some market participants. This would have the effect of providing
these market participants with a potentially lower cost option
(relative to proprietary feeds) for low latency, high content market
data. The lower cost of either self-aggregating proposed consolidated
market data or obtaining a competing consolidator's data feed would
come at the expense of losing the full set of data currently available
via proprietary feeds, because the proposed consolidated market data
definition does not include all data elements currently available via
proprietary data feeds. Nevertheless, some market participants may find
that the expanded content of core data makes the trade-off worth it and
may choose to drop their proprietary feed subscriptions in favor of the
proposed consolidated market data.
This effect would represent a transfer from exchanges who sell
proprietary data feeds to the market participants who would save money
by either self-aggregating proposed consolidated market data or
subscribing to a competing consolidator's data feed. In the latter
case, a portion of the benefit is also transferred to the competing
consolidator in the form of additional business. The Commission
preliminarily believes that a transfer from the exchanges to market
participants may help market participants enhance their product and
service offerings to their customers. Additional business and revenues
for competing consolidators may enhance competing consolidators'
efforts to offer higher quality products and a wider range of product
offerings.\1107\
---------------------------------------------------------------------------
\1107\ See supra Section VI.C.2(c).
---------------------------------------------------------------------------
It is possible that changes to the pricing and customer base of
core and proprietary data feeds may not have a uniform impact across
all exchanges. Some exchanges currently have more proprietary feed
revenue than others, and some exchanges may currently rely more on
revenue from SIP data fees than other exchanges. To the extent that an
exchange receives a large share of revenue from its proprietary feed
business, the impact of these potential reductions in proprietary feed
subscriptions could be large for that exchange. To the extent that an
exchange receives only a small portion of its revenue from proprietary
feed subscriptions, the impact of these potential reductions in
subscriptions could be small for that exchange. The Commission invites
comment on the issue.
The Commission also notes that the exchanges' revenues from
connectivity services may increase or decrease, depending on any new
data connectivity fees that the exchanges may propose for data content
use cases. The connectivity fees for proposed consolidated market data
must be fair and reasonable and not unreasonably discriminatory.\1108\
If these new connectivity fees are higher than current fees, there is a
possibility that the exchanges' overall revenue from connectivity
services would increase. It is also possible that exchanges could lose
revenue from existing customers reducing the number of ports or the
amount of bandwidth they purchase as they switch to competing
consolidators for some use cases. The overall effect on the exchanges'
connectivity revenues is uncertain, and the impact on connectivity
revenues could differ across different exchanges.
---------------------------------------------------------------------------
\1108\ See supra note 620.
---------------------------------------------------------------------------
The Commission preliminarily believes that these competitive
pressures on the exchange proprietary feed and connectivity business
could also have the effect of causing the exchanges to lower the fees
they charge for these services in an effort to stay competitive with
the proposed consolidated market data. This effect represents a
transfer from the exchanges to the customers of these services. To the
extent that existing customers of these services invest the money saved
from lower fees in new products (such as expanding brokerage services)
this effect will also have benefit of encouraging the creation of new
products and services. To the extent that the lower fees for these
services enable new market participants to subscribe to these feeds and
offer the services that these feeds are required for (such as high
quality execution brokerage services), this effect will also represent
a benefit in the form of new competition in the broker-dealer business.
The Commission preliminarily believes, however, that if a small
latency differential between competing consolidator feeds and the
proprietary data feeds remains, then the above effects are likely to be
small, owing to the nature of high speed competition.\1109\ However,
this limitation would only be for the case where current subscribers to
proprietary data feeds switch to using a competing consolidator feed.
In the case of those proprietary feed subscribers who become self-
aggregators, the Commission preliminarily believes that it is unlikely
that this would result in a latency differential compared to receiving
proprietary data.\1110\ It is also
[[Page 16854]]
possible that the data that would remain exclusive to proprietary feeds
would also reduce the incentives for market participants to switch to
using consolidated market data only, further reducing the size of the
above effects.
---------------------------------------------------------------------------
\1109\ See supra Section VI.B.2(b).
\1110\ More generally, the proposed rule would enable some
reduction in the latency differential between current market
participants to the extent that such market participants would be
willing to make the necessary technology and personnel investments
to take advantage of the latency reductions provided by the
decentralized consolidation model. Thus, while some differences in
latency may remain, the barriers to entry for market participants to
compete in the latency sensitive businesses at various levels of
sophistication and competitiveness would be reduced.
---------------------------------------------------------------------------
In the event that proprietary data feed subscribers are willing to
switch to receiving new consolidated market data and a latency
differential remains between these feeds and feeds provided by
competing consolidators, the effects discussed in this section would
apply only to those market participants who become self-aggregators.
The Commission preliminarily believes that the set of current
subscribers of proprietary feeds willing to become self-aggregators may
be smaller than the set of current subscribers willing to switch to
using a competing consolidator, as it is possible that subscribing to a
competing consolidator would be more convenient or less costly. To the
extent this is the case, the size of the effects described in this
section will be reduced. Furthermore, these self-aggregators may
continue to enjoy a latency advantage over customers of competing
consolidators.
To the extent that the changes to proprietary feed subscriptions
described above are realized, the exchanges would have corresponding
losses in revenue or profit from the provision of proprietary data.
Since the Commission is unable to determine how many broker-dealers or
other market participants would no longer want to use proprietary data
feeds as a result of this rule, it is unable to determine the size of
this potential reduction in revenue or profit.
(b) New Entrants Into the Market Making, Broker-Dealer and Other
Latency Sensitive Trading Businesses
The Commission preliminarily believes that proposed amendments may
lead to new market participants entering the market making, smart order
routing broker-dealer, and other latency sensitive trading businesses.
For instance, it is possible that currently there are broker-dealers
who would try to compete in the business of sophisticated order routing
but choose not to because of the cost of the market data necessary to
be competitive. To the extent that the expanded content of new core
data and the latency reductions due to the introduction of the
decentralized consolidation model make consolidated market data a
viable data product for smart order routing, the Commission
preliminarily believes that these changes could induce these broker-
dealers to enter the business.\1111\ This would have the benefit of
increasing competition in the sophisticated order routing broker-dealer
business.
---------------------------------------------------------------------------
\1111\ These would be broker dealers who have not entered these
businesses because, currently, the only way to obtain the benefits
associated with the new, expanded core data and decentralized
consolidation model is to subscribe to proprietary data feeds, which
the Commission preliminarily expects to remain more expensive than
core data.
---------------------------------------------------------------------------
The Commission preliminarily believes that access to this new,
faster consolidated market data could encourage new entrants into the
automated market maker business. This would not only improve the
competitiveness of this business but also may increase liquidity in the
corresponding markets.
The Commission preliminarily believes that if these new entrants
would want to use a competing consolidator, and if a small latency
differential between competing consolidator feeds and the proprietary
data feeds remains, then this effect is likely to be small.\1112\ If
instead these potential new entrants were to become self-aggregators,
then this limitation would be reduced, because the Commission
preliminarily believes that there is unlikely to be a significant
latency differential between being a self-aggregator and using
proprietary data feeds. However, if self-aggregation is required to be
a new entrant in these businesses, the number of potential new entrants
could be small, since using a competing consolidator may be more
convenient or less costly than self-aggregating.\1113\ It is also
possible that potential participants in the sophisticated SOR,
automated market making, and other latency sensitive trading businesses
find that they cannot compete effectively without using the data that
would remain exclusive to proprietary feeds. To the extent this is the
case, the effects discussed above would be further limited.
---------------------------------------------------------------------------
\1112\ See supra Section VI.B.2(b).
\1113\ For related discussion on latency advantages, see supra
note 1110.
---------------------------------------------------------------------------
(c) Effects From the Interaction With the Consolidated Audit Trail
(i) CAT Baseline
Rule 613 of Regulation NMS requires the national securities
exchanges and national securities associations (``self-regulatory
organizations'') to jointly develop and submit to the Commission a
national market system plan to create, implement and maintain a
consolidated audit trail (``CAT'').\1114\ At the time of adoption, and
even today, trading data was and is inconsistent across the self-
regulatory organizations and certain market activity is difficult to
compile because it is not aggregated in one, directly accessible
consolidated audit trail system. The goal of Rule 613 was to create a
system that provides regulators with more timely access to a
sufficiently comprehensive set of trading data, enabling regulators to
more efficiently and effectively reconstruct market events, monitor
market behavior, and identify and investigate misconduct. Rule 613 thus
aims to modernize a reporting infrastructure to oversee the trading
activity generated across numerous markets in today's national market
system.
---------------------------------------------------------------------------
\1114\ See supra note 624.
---------------------------------------------------------------------------
On November 15, 2016, the Commission approved the national market
system plan required by Rule 613 (``CAT NMS Plan'' or ``Plan'') that
was submitted by the self-regulatory organizations.\1115\ In the CAT
NMS Plan, the Participants described the numerous elements they
proposed to include in the CAT, including, (1) requirements for the
plan processor responsible for building, operating and maintaining the
Central Repository,\1116\ (2) requirements for the creation and
functioning of the Central Repository, (3) requirements applicable to
the reporting of CAT Data by plan participants and their members. ``CAT
Data'' is defined in the CAT NMS Plan as ``data derived from
Participant Data, Industry Member Data, SIP Data, and such other data
as the Operating Committee may designate as `CAT Data' from time to
time.'' \1117\
---------------------------------------------------------------------------
\1115\ See id.
\1116\ The Central Repository is the repository responsible for
the receipt, consolidation, and retention of all information
reported to the CAT. See CAT NMS Plan, supra note 624, at Section
1.1.
\1117\ See id. The Operating Committee is the governing body of
the CAT NMS Plan.
---------------------------------------------------------------------------
The CAT NMS Plan requires plan participants and their members to
record and report various data regarding orders by 8:00 a.m. the day
following an order event.\1118\ The Plan requires industry members to
record timestamps for order events in millisecond or finer increments
with a clock synchronization standard of within 50 milliseconds.\1119\
The CAT NMS Plan Processor, FINRA CAT, is then required to process the
order data into a uniform format, link the entire lifecycle of each
order, and combine it with other CAT
[[Page 16855]]
Data such as SIP Data.\1120\ The Plan Processor is also required to
store the CAT Data to allow the ability to return results of queries on
the status of order books at varying time intervals.\1121\ Regulators,
such as the Commission and SROs will use the resulting CAT Data only
for regulatory purposes such as reconstructing market events,
monitoring market behavior, and identifying and investigating
misconduct.\1122\ At this time, the Commission has little information
about what specific data, in addition to CAT Data, such as proprietary
depth of book and auction data, the SROs currently intend to include in
their enhanced surveillance systems.\1123\
---------------------------------------------------------------------------
\1118\ See id. at Sections 6.3 and 6.4.
\1119\ See id. at Section 6.8.
\1120\ See id. at Section 6.5.
\1121\ See id. at Section 6.5(c)(ii).
\1122\ See id. at Section 6.5(g); CAT NMS Plan Approval Order,
supra note 624, at 84833-4.
\1123\ See Rule 613(f) of Regulation NMS.
---------------------------------------------------------------------------
(ii) Economic Effects on CAT
The Commission recognizes that the proposal could affect the
Consolidated Audit Trail, resulting in benefits to investors from
improved regulatory oversight, costs to CAT from potentially switching
from a current SIP to a competing consolidator, costs to CAT from
integrating consolidated market data into the CAT Data model, and costs
to SROs of updating their enhanced surveillance systems to use
consolidated market data provided by the CAT.\1124\ Specifically, the
Plan Processor for the Consolidated Audit Trail, FINRA CAT, is required
to incorporate all data from SIPs or pursuant to an NMS plan into the
Consolidated Audit Trail. If the Commission were to approve these
amendments, the CAT NMS Plan Operating Committee could choose to
purchase such data from a different entity and would be required to
purchase the expanded consolidated data.
---------------------------------------------------------------------------
\1124\ See supra Section IV.B.5 for a more detailed discussion
of how the proposal would alter the requirements of the Consolidated
Audit Trail NMS Plan.
---------------------------------------------------------------------------
The Commission believes that the incorporation of the expanded data
into CAT would improve regulatory oversight to the benefit of
investors. As explained in the Approval order for the Consolidated
Audit Trail, the expected benefits of the CAT include ``improvements in
regulatory activities such as the analysis and reconstruction of market
events, in addition to market analysis and research . . ., as well as
market surveillance, examinations, investigations, and other
enforcement functions,'' and derive from improvements in four data
qualities: Accuracy, completeness, accessibility, and timeliness.\1125\
Accuracy refers to whether the data about a particular order or trade
is correct and reliable. Completeness refers to whether a data source
represents all market activity of interest to regulators, and whether
the data is sufficiently detailed to provide the information regulators
require. Accessibility refers to how the data is stored, how practical
it is to assemble, aggregate, and process the data, and whether all
appropriate regulators could acquire the data they need. Timeliness
refers to when the data is available to regulators and how long it
would take to process before it could be used for regulatory analysis.
---------------------------------------------------------------------------
\1125\ See CAT Approval Order, supra note 624, at 84802-3.
---------------------------------------------------------------------------
The Commission believes that the expanded consolidated data from
the proposal could improve the completeness and accessibility of CAT
Data.\1126\ In particular, the proposal would improve the completeness
of CAT Data because CAT Data would contain quotes smaller than 100
shares, depth of book information, and auction information. While the
CAT will contain query functionality capable of recreating limit order
books, the depth of book information would allow regulators to see the
displayed order books that others see around the time of the order
events. While the Commission does not know if SROs plan to incorporate
depth of book and auction information into their enhanced surveillance
systems or other regulatory activities using CAT Data, the proposal
would improve the accessibility of consolidated market data for SRO and
Commission CAT-related uses because SROs would have access to such data
in a standardized format through the Consolidated Audit Trail instead
of through the variety of formats currently used in proprietary data.
The proposal would also improve accessibility because the SROs and
Commission would have such data on the same system as CAT Data.
---------------------------------------------------------------------------
\1126\ The Commission believes the proposal would not affect the
accuracy or timeliness of CAT Data. The Commission does not believe
that the proposal would alter the accuracy of timestamps of trades
and quotes. While some competing consolidators might offer data that
more accurately represents the data observed by certain market
participants at the time of an order event, the Commission does not
expect that all market participants would observe the exact same
data at that order event, much like the case today. In addition,
industry member clock synchronization and timestamps on the order
events in CAT Data are not fine enough for the latency improvements
to affect the accuracy of assigning an order event to the
consolidated market data likely observed at the time of the order
event. Finally, the order data in CAT is not required to be reported
until 8:00 a.m. the day following an order event. Hence, because
latency improvements from the proposal would be measured in
microseconds, the Commission does not believe that the proposal
would improve the timeliness of CAT Data.
---------------------------------------------------------------------------
The Commission believes that the potential improvements in
completeness and accessibility would facilitate more efficient
regulatory activities using CAT Data that would benefit investors. In
particular, the proposal could make broad-based market reconstructions
using CAT Data more efficient by increasing the depth of information
that could be incorporated into such reconstructions with CAT Data
alone. The Commission believes that depth of book information, quote
information in sizes less than 100 shares, and auction information are
all valuable in a broad-based market reconstruction. Further, the
improvements would allow for more targeted surveillances and risk-based
examinations using CAT Data alone. For example, the depth of book
information would be valuable when building surveillances to detect
spoofing or in investigating spoofing because spoofing often involves
creating a false impression of depth at prices outside of the best bid
or offer. In addition, the auction information would facilitate auction
market reconstruction to evaluate manipulation concerns and inform
policy. Quote information in sizes less than 100 shares would
facilitate analysis by regulators of broker-dealers' best execution
practices by providing potential execution prices that are better than
the current NBBO.\1127\
---------------------------------------------------------------------------
\1127\ See supra Section VI.C.1(b)(i) for data showing that odd-
lot quotes in higher priced securities often improve upon the
current NBBO.
---------------------------------------------------------------------------
The Commission recognizes that the interaction between the proposal
and the Consolidated Audit Trail could also create additional costs.
Such additional costs are likely to be borne by SROs and their members.
These costs could include switching costs, additional data costs, and
data storage and processing costs. The proposal would result in
switching costs if the CAT Central Repository has to obtain the data
from a different source. The source of the switching costs could be
from changing data input formats and technical specifications, which
would require one-time implementation costs. The Commission recognizes
that the SIP technical specifications change a few times a year such
that the switching costs associated with the proposal would be the
costs in excess of the regular costs incurred when the SIP technical
specifications change.\1128\ The
[[Page 16856]]
Commission at this time, cannot judge whether switching data providers
would result in higher or lower on-going data intake costs but data
intake costs presumably could be factored into the selection of a
competing consolidator. The Commission recognizes that increasing the
amount of data managed and analyzed by CAT would increase the costs of
data storage and processing to integrate the expanded data with other
CAT Data. However, the Commission does not expect the proposal to
substantially increase the costs of operating the CAT because any
marginal increase in cost associated with consolidated market data
would be dwarfed by the processing costs already incurred by CAT, which
includes processing for all options quotation activity among other
order lifecycle events and is significantly larger in size than
consolidated market data.
---------------------------------------------------------------------------
\1128\ See CTA, Technical Documents, available at https://www.ctaplan.com/tech-specs (last accessed Jan. 30, 2020) (showing
the SIP tech specs version history, which identifies the changes
over the years); UTP Data Feed Services Specification, supra note
142 (showing the SIP tech specs version history, which identifies
the changes over the years).
---------------------------------------------------------------------------
The Commission recognizes that the proposal would result in SROs
incurring costs to integrate additional CAT Data into their
surveillances. Even if the SROs would otherwise include depth of book
and auction information in the CAT-related surveillances, they would
incur costs in changing their surveillances to use the data in CAT
rather than using data from proprietary feeds.
The Commission also considered whether the requirements in CAT
would impose costs as a result of CAT's effect on the competition among
competing consolidators. Because the Commission does not believe CAT
would significantly affect the competition among competing
consolidators,\1129\ it would not impose additional costs resulting
from this effect.
---------------------------------------------------------------------------
\1129\ See infra Section VI.D.2 for a discussion of the
interaction between the proposal and CAT on competition among
competing consolidators.
---------------------------------------------------------------------------
The Commission preliminary believes that CAT implementation
milestones will not be impacted by the infrastructure proposal given
that sufficient lead time would be available and integration efforts
could be scheduled as part of standard release planning. The Commission
believes that switching market data providers and expanding
consolidated market data within CAT would require limited resources
relative to the current implementation activities. Further, any
resources devoted by SROs to updating their surveillances are separate
from the efforts to implement CAT.
(d) Effects on Data Vendors
The Commission preliminarily believes that the proposed amendments
would have an effect on the broad financial data services industry. To
the extent that the amendments lead to cheaper (relative to proprietary
data feeds) and higher content consolidated market data, the Commission
preliminarily expects that costs to data vendors would go down and the
ability of such vendors to grow their customer base would increase. It
is also possible that data vendors may increase the range and quality
of products they offer using the new expanded core data and that new
firms enter the data vendor business. To the extent that the risk of
price increases for core data is realized instead, the Commission
believes these businesses could potentially face higher costs, which
when passed on to clients could cause their customer base to shrink. In
the event that these outcomes are severe, it is possible that some data
vendors could exit the market. The Commission is uncertain about the
potential size and scope of these effects because it is unable to
determine both the role of these costs in producing the products
supplied by the data services industry and the extent to which the
enhanced quality of new core data could play a role in the quality of
their products. The Commission invites comments on the issue.
(e) Request for Comments
The Commission requests comments on its analysis of the economic
effects from the interaction of changes to core data and the
decentralized consolidation model. In particular, the Commission
solicits comment on the following.
261. Do you agree with the Commission's analysis of the effect of
the proposal on the proprietary data business? Why or why not? Please
explain in detail.
262. Would exchanges lose proprietary data business as a result of
the proposed decentralized consolidation model? Why or why not? Please
explain. Would any market participants still elect to purchase
proprietary data feeds from exchanges? If so, which market
participants? Please explain in detail. What would be the net effect of
any changes in this business?
263. The Commission invites comment on the role of SIP data revenue
and proprietary feed revenue in the overall data revenue of exchanges.
To what extent do exchanges rely on each source of revenue? Please
explain in detail.
264. Do you agree with the Commission's analysis of the effects of
the proposed amendments on the broad financial industry data services
industry? Why or why not? Please explain in detail. Would the proposal
lead to new broker-dealers developing SORs, new market makers, or other
new latency sensitive traders? If so, what would be the economic effect
of these new players? Please explain in detail.
265. Do you agree with the Commission's analysis of the effects of
the interaction between the proposal and the Consolidated Audit Trail?
Why or why not? Please explain.
266. Would the proposal result in more complete and/or accessible
CAT Data? Please explain. How would regulators use the additional CAT
Data resulting from the proposal and how would investors benefit from
this usage? Please explain.
267. To what extent would the proposal alter the SROs enhanced
surveillances using CAT Data? Please explain. Would the proposal result
in SROs incorporating more depth of book and auction information into
their surveillances? What would be the costs and benefits of doing so?
Please explain.
268. If the proposal resulted in FINRA CAT switching data
providers, what would be the switching costs? How would the proposed
amendments affect the implementation and ongoing costs of CAT? Please
provide estimates if possible.
269. Do you agree that the proposal would not affect the
implementation of CAT? Please explain.
270. Do you agree with the Commission's analysis of the effects of
the proposal on data vendors? Why or why not? Please explain.
5. Request for Comments on the Economic Effects of the Proposed Rule
The Commission requests comment on its analysis of the economic
effects of the proposed amendments. In particular, the Commission
solicits comment on the following:
271. Do you believe the Commission's analysis of the potential
economic effects of the proposed amendments is reasonable? Why or why
not? Please explain in detail.
272. Do you believe the proposed amendments may have unintended
consequences that are not captured by the Commission's analysis of the
potential economic effects? Why or why not? Please explain in detail.
273. Do you agree with the Commission's analysis of the benefits of
the proposed amendments? Why or why not? Please explain in detail.
274. Do you agree with the Commission's analysis of the costs of
[[Page 16857]]
the proposed amendments? Why or why not? Please explain in detail.
275. The Commission requests that commenters provide relevant data
and analysis to assist us in determining the economic consequences of
the proposed amendments. In particular, the Commission requests data
and analysis regarding the costs SROs, exclusive SIPs, and market
participants may incur, and benefits they may receive, from the
proposed amendments.
D. Impact on Efficiency, Competition, and Capital Formation
1. Efficiency
The Commission preliminarily believes that the proposed amendments
would have a number of different effects on efficiency. In particular,
the Commission preliminarily believes that the proposed amendments
would: Lead to more efficient gains from trade, improve the efficiency
of order execution for some market participants, improve price
efficiency, and affect how efficiently core data is distributed. The
rest of this section discusses these different effects of the proposed
amendments on efficiency in detail. The Commission solicits comments
whether the proposed amendments might have a significant impact on
other forms of efficiency.
As discussed above, the Commission preliminarily believes that the
expansion of core data under the proposed amendments would increase
transparency for market participants who do not currently access
proprietary DOB feeds and allow them to more easily find liquidity that
they can trade against.\1130\ Currently, some of these market
participants may not trade because they cannot see the quotes available
to them, either through a lack of information about odd-lots, depth of
book, or auction information. The Commission preliminarily believes
that the proposed amendments would alleviate some of this information
shortage and would allow traders to more easily find counterparties.
This may result in more voluntary trades occurring between market
participants, which could lead to more efficient gains from trade,
since these are trades which currently do not take place only because
of a lack of information.\1131\ However, if the inclusion of additional
odd-lot, depth of book, or auction information does not induce
additional voluntary trading from market participants who do not
currently access proprietary DOB feeds, then the proposed amendments
may not produce more efficient gains from trade.\1132\
---------------------------------------------------------------------------
\1130\ See supra Section VI.C.1(b).
\1131\ Id.
\1132\ Id.
---------------------------------------------------------------------------
The Commission preliminarily believes that the expansion of core
data could also improve the efficiency with which some market
participants, or their broker-dealers, execute orders. As discussed
above, by adding odd-lot, depth of book, and auction information to
core data, the proposed amendments would reduce information asymmetry
between broker-dealers and other market participants who subscribe to
proprietary data feeds and users of current SIP data. This could
improve the ability of broker-dealers and other market participants who
currently do not have access to this information to trade against those
market participants who do. As a result, this could improve the
efficiency with which they execute their orders by allowing them to
select a better trading venue or method of executing their order.
Furthermore, for market participants who currently rely on exclusive
SIPs for their order executions, the reduction in latency provided by
the decentralized consolidation model could reduce the risk that their
orders are picked off, which could reduce their adverse selection
costs. This could potentially reduce their transaction costs and allow
them to more efficiently achieve their investment or trading objectives
or those of their clients.\1133\
---------------------------------------------------------------------------
\1133\ Id.
---------------------------------------------------------------------------
As discussed previously, the Commission preliminarily believes that
there is some potential for new broker-dealers to become competitive in
the market for sophisticated order execution as a result of this rule
because they may be able to use the expanded content and lower latency
of core data to develop SORs or other tools that allow them to compete
more effectively with broker-dealers who currently base order execution
decisions off of proprietary DOB data.\1134\ To the extent that this
happens, the clients of these broker-dealers could see their orders
executed more efficiently and their execution costs reduced.
---------------------------------------------------------------------------
\1134\ See supra Section VI.C.4(b).
---------------------------------------------------------------------------
The current lack of certain odd-lot quote, depth of book, and
auction information in SIP data could affect price efficiency. The gap
in information between data provided by exclusive SIPs and proprietary
data products may cause prices in some securities to be less efficient,
i.e., to deviate further from fundamental values, if market
participants with access to proprietary data products do not
incorporate this information into prices quickly enough through their
trading or quoting activity. However, the Commission does not know the
extent of this possible effect, but it preliminarily believes the
effect could be larger in less actively traded securities where the gap
in information between SIP data and proprietary data products is
larger.
The Commission preliminarily believes that, to the extent that
there is information in the new core data elements that is not
currently reflected in market prices, the proposed amendments may
improve price efficiency.\1135\ In particular, the proposed
introduction of odd-lot quote, depth of book, and auction information
into core data could result in the information becoming impounded in
prices more rapidly and accurately as a result of the more widespread
dissemination of this information. As the Commission understands that
the most sophisticated traders already have access to this information
and likely already compete to profit from it, the Commission expects
that the size of this gain in price efficiency would be small because
this information is already impounded quickly into prices.
---------------------------------------------------------------------------
\1135\ See supra Section VI.B.2(a).
---------------------------------------------------------------------------
Finally, under the current rule, the exclusive SIPs operate like
public utilities in their consolidation and distribution of the NMS
stock data.\1136\ The proposed changes would unbundle the data fees for
consolidated market data from the fees for its consolidation and
distribution.\1137\ The decentralized consolidation model would subject
the fees charged by competing consolidators for the consolidation and
distribution of consolidated market data to competition. The Commission
preliminarily believes that the proposed decentralized consolidation
model would lead to consolidated market data being distributed in a
more timely, efficient, and cost-effective manner. The Commission
preliminarily believes that the proposed changes to the consolidation
and distribution of consolidated data is economically similar to the
restructuring of public utilities and may have an impact on the
efficiency with which the consolidation and distribution is carried
out. In particular, as discussed above, the proposed decentralized
consolidation model is anticipated to produce better investment to
lower costs and improve quality in the consolidation and distribution
of consolidated market data, as well as promote better price
competition (all of which translates into a more efficient allocation
of capital)
[[Page 16858]]
than the bidding process currently in place.\1138\
---------------------------------------------------------------------------
\1136\ See supra note 390.
\1137\ See supra Section VI.C.2(c).
\1138\ See id.
---------------------------------------------------------------------------
The Commission acknowledges the uncertainty in this conclusion. The
literature on the economics of restructuring of public utilities does
not provide clear guidance. Some papers show efficiency gains from
regulatory restructuring,\1139\ yet others claim no efficiency gains or
efficiency declines after regulatory restructuring of public
utilities.\1140\ The likely impact of the proposed changes rests on the
strengths and weaknesses of the existing exclusive SIP model.
---------------------------------------------------------------------------
\1139\ See, e.g., Kira R. Fabrizio et al., Do Markets Reduce
Costs? Assessing the Impact of Regulatory Restructuring on US
Electric Generation Efficiency, 97 a.m. ECON. REV. 1250 (2007).
\1140\ See, e.g., Severin Borenstein, The Trouble with
Electricity Markets: Understanding California's Restructuring
Disaster, 16 J. ECON. PERSP. 191 (2002).
---------------------------------------------------------------------------
The Commission preliminarily believes that the existing exclusive
SIP model has an important weakness: It does not provide sufficient
competitive incentives.\1141\ SIPs have significant market power in the
market for core and aggregated market data products and, as a result,
do not need to compete hard to capture demand for their products. The
Commission preliminarily believes that the adoption of the
decentralized consolidation model would open up the consolidation and
distribution services to data consolidators that would need to
vigorously compete to capture some demand for the data they provide.
This need to compete for market share would create incentives to reduce
costs. As discussed above, the Commission preliminarily believes that
this competition could incentivize competing consolidators to pass on
some of those cost savings to customers by charging lower service fees
in order to capture market share.\1142\ The focus to capture market
share might also lead to technological improvements for competing
consolidators to be able to differentiate themselves in the eyes of the
customers and generate demand.\1143\ The Commission preliminarily
believes that these improvements in data provision technology and the
introduction of competitive forces on fees for the consolidation and
distribution of consolidated market data could result in a more
efficient allocation of capital.
---------------------------------------------------------------------------
\1141\ See supra Section VI.B.3(a) (discussing SIPs market
power).
\1142\ See supra Section VI.C.2(b). However, the Commission also
acknowledges the possibility that fees for the consolidation and
distribution of consolidated market data may remain the same or
increase, because consolidated market data will contain more
information and/or there might not be enough competition among
competing consolidators.
\1143\ Several studies found evidence of efficiency gains and
technological improvements from restructuring in the public
utilities sector. In the electricity industry, for example, the
introduction of competition to the electricity generation services
created strong incentives to become more cost efficient and
technologically advanced to improve operating performance. If a
plant could not become efficient enough to compete, it would lose
business and have to exit the market. Craig and Savage (2013)
establish a 9% increase in efficiency in investor-owned electricity
plants in response to the restructuring and increasing competition
in the electricity sector. Similarly, Davis and Wolfram (2012) argue
that electricity market restructuring is associated with a 10
percent increase in operating performance for nuclear plants
generating electricity. The authors state that increasing
competition led to managers focusing more attention on financial
costs of outages. See J. Dean Craig and Scott J. Savage, Market
Restructuring, Competition and the Efficiency of Electricity
Generation: Plant-level Evidence from the United States 1996 to
2006, 34 ENERGY J. 1 (2013); Lucas W. Davis and Catherine D.
Wolfram, Deregulation, Consolidation, and Efficiency: Evidence from
US Nuclear Power, Am. Econ. J.: Applied Econ. (Oct. 2012), at 194.
---------------------------------------------------------------------------
Additionally, the decentralized consolidation model could allow
market participants to receive consolidated market data more
efficiently. Instead of having to receive separate consolidated market
data feeds from two exclusive SIP plan processors, UTP and CTA/CQ
Plans, market participants would have the option to receive all of
their consolidated market data from one competing consolidator.\1144\
This could allow market participants to achieve efficiencies in the
design and in making modifications to their systems for the intake of
consolidated market data because they would only have to configure
their systems to intake consolidated market data from one source.
---------------------------------------------------------------------------
\1144\ The Commission acknowledges that market participants may
subscribe to more than one competing consolidator for different core
data products or as a backup feed.
---------------------------------------------------------------------------
2. Competition
As discussed previously, the Commission preliminarily believes this
proposed rule would have a substantial impact on competition. The
Commission preliminarily identifies seven markets or areas of the
market for which the proposed rule would have a substantial impact on
competition. The Commission acknowledges that the seven markets or
areas may not be a comprehensive list of all markets or areas for which
the proposed rule might have an impact on competition. However, the
Commission preliminarily believes that competition in these seven
markets or areas are most likely to be impacted substantially by the
proposed rule. The Commission solicits comments regarding whether the
proposed rule might have a substantial impact on competition in other
markets or areas of the market.
First, the proposed rule introduces a competitive marketplace for
the consolidation and dissemination of consolidated market data to
replace the centralized consolidation model, which is not currently
subject to competitive pressures.\1145\ Under the proposed amendments
multiple competing consolidators would be able to distribute
consolidated market data to market participants. The Commission
preliminarily believes that, since market participants could freely
select the competing consolidator that charged the lowest distribution
fee or offered better quality (i.e., lower latency, a more reliable
system, etc.), the competing consolidators would be subject to
competitive forces and the marketplace for the consolidation and
dissemination of proposed consolidated market data would be competitive
if enough competing consolidators enter the market.\1146\ As discussed
above, the Commission preliminarily believes that this introduction of
competition could reduce the prices competing consolidators charge for
the consolidation and distribution of consolidated market data and
improve the quality of consolidated market access.\1147\ The Commission
recognizes the risk that there could be too few competing consolidators
to realize these benefits fully, in which case the proposed competitive
changes may have a number of costs,\1148\ including higher prices for
the consolidation and dissemination of consolidated market data, which
could increase the overall prices market participants pay for
consolidated market data.\1149\
---------------------------------------------------------------------------
\1145\ See supra Sections IV.B.2, VI.B.3(a).
\1146\ The Commission assumes that enough competing
consolidators will enter the market in order to make it competitive.
See supra Section VI.C.2(a).
\1147\ See supra Sections VI.C.2(a), VI.C.2(b), VI.C.2(c).
\1148\ See supra Sections VI.C.2(a), VI.C.2(d).
\1149\ See supra Section VI.C.2(a).
---------------------------------------------------------------------------
The Commission recognizes that the extension of Regulation SCI to
include competing consolidators could impact competitive dynamics in
the competing consolidator market. The Commission preliminarily
believes the costs associated with being an SCI entity could raise the
barriers to entry for firms seeking to become competing consolidators
who are not already SCI entities, including market data aggregation
firms.\1150\ Exclusive SIPs and SROs who seek to become competing
consolidators could gain a
[[Page 16859]]
competitive advantage over these firms because they would face lower
barriers to entry since they are currently SCI entities and already
incur many of these costs.\1151\ Therefore, the extension of Regulation
SCI to competing consolidators could result in fewer firms seeking to
become competing consolidators which could lead to less competition in
the competing consolidator market. Less competition and less innovation
would reduce the incentives of competing consolidators to reduce the
costs and improve the speed and quality of their consolidated market
data aggregation and dissemination services.
---------------------------------------------------------------------------
\1150\ See supra Sections VI.C.2(a)(i)b., VI.C.2(e)(ii).
\1151\ See supra Sections V.G.,ViC.2(a)(i)b.
---------------------------------------------------------------------------
Additionally, the Commission preliminarily believes that the public
disclosure of the information in Form CC and the performance metrics
and operational information competing consolidators would provide on
their websites would enhance competition between competing
consolidators.\1152\ The public disclosure of competing consolidator
fees and performance metrics would allow market participants to more
easily compare competing consolidators and select the ones that charged
the lowest fees or offered the best performance. This could enhance
competition between competing consolidators. For example, if the public
disclosures show that certain competing consolidators have higher fees
or poor performance, it may result in those competing consolidators
losing subscribers and earning lower revenues. Similarly, competing
consolidators who display lower prices or superior system performance
may be able to attract more subscribers and earn more revenue. This in
turn could enhance competition by incentivizing competing consolidators
to lower fees and/or innovate and make investments in their systems in
order to improve system performance in order to attract more
subscribers. In theory, the Commission acknowledges that the public
disclosure of Form CC could harm competition by making firms reluctant
to enter the competing consolidator market and reducing the incentives
of competing consolidators to innovate if it discloses certain
information that a competing consolidator might view as a ``trade
secret'' or giving it a competitive advantage. However, the Commission
believes that these effects are not likely to occur because it
preliminarily believes that the disclosures on Form CC are not detailed
enough to allow other market participants to reproduce a competing
consolidator's ``trade secret.'' Additionally, the Commission
preliminarily believes that the delayed public disclosure of material
amendments to Form CC should prevent another competing consolidator
from replicating a competing consolidator's innovations before it has a
chance to implement them.\1153\
---------------------------------------------------------------------------
\1152\ See supra Section VI.C.3.
\1153\ See supra Sections IV.B.2(e), VI.C.3.
---------------------------------------------------------------------------
The Commission recognizes that the registration process for Form CC
could create uncertainty about whether a Form CC would be declared
ineffective. This could potentially harm competition in the market for
competing consolidators by raising the barriers to entry and creating a
disincentive for entities to become competing consolidators. However,
the Commission preliminarily believes that these effects will not be
significant because the Commission would not declare a Form CC
ineffective without notice and opportunity for hearing. Additionally,
entities whose Form CC is declared ineffective would still have the
opportunity to file a new Form CC with the Commission.
The Commission considered the effect of the interaction between the
proposal and the CAT NMS Plan on competition among competing
consolidators, but believes that this interaction would not have a
significant effect on the competitive landscape. In particular, the
Commission considered two effects: First, the effect in the event that
there is a bias toward an exchange-operated competing consolidator over
other competing consolidators and second, any competitive advantage for
the competing consolidator selected for the CAT NMS Plan. In relation
to any bias, the Commission notes that the CAT NMS Plan would be only
one of many potential customers of the competing consolidator, so this
bias is not likely to affect the market unless the selection produces a
competitive advantage. In particular, a competing consolidator could
enjoy a competitive advantage only if broker-dealers believe that
market surveillances would be less likely to appear to show violations
if the broker-dealers made trading decisions using the same data used
in SRO surveillances. However, the latency differences across the
competing consolidators are likely to measure in the microseconds while
the clock synchronization requirements for industry members in the CAT
NMS Plan is 50 milliseconds for electronic order flow.\1154\ Therefore,
the Commission does not believe the CAT's choice of competing
consolidator would confer any regulatory value on the competing
consolidator or their broker dealer clients.
---------------------------------------------------------------------------
\1154\ See CAT NMS Plan, supra note 624, at Section 6.8.
---------------------------------------------------------------------------
Second, the Commission preliminarily believes that the expanded
content and reduced latency of consolidated market data would make it a
more viable substitute for proprietary data feeds.\1155\ The Commission
preliminarily believes that this would increase competition between
consolidated market data and exchange proprietary data feeds. These
competitive pressures could lead to lower prices for proprietary data
feeds and may reduce the data costs that market participants pay, at
the expense of the SROs who charge the fees.\1156\ The Commission
recognizes the risk that the extension of Regulation SCI to include
competing consolidators could lead to less competition in the competing
consolidator market, which could reduce the incentives of competing
consolidators to reduce the cost and improve the speed and quality of
consolidated market data. If this occurs, it could make consolidated
market data less of a viable substitute for proprietary data feeds,
which would reduce the competitive pressures consolidated market data
would impose on proprietary data feeds.
---------------------------------------------------------------------------
\1155\ However, consolidated market data would not be a perfect
substitute for the proprietary data feeds because it would not
contain all the information in proprietary data feeds. For example,
the expanded core data would not include full depth of book
information or information on all odd-lots. See supra Section
VI.C.4.
\1156\ See supra Section VI.C.4(a).
---------------------------------------------------------------------------
Third, the Commission preliminarily expects the new decentralized
consolidation model for proposed consolidated market data to create
competitors to market data aggregators for two reasons. First, the
potential revenues from becoming a competing consolidator may cause new
firms to enter the market for the consolidation and distribution of
market data. Second, some market participants who currently use market
data aggregators may switch to getting proposed consolidated market
data from a competing consolidator. This could have two effects: The
competition could lead to lower prices and higher quality in the market
data aggregator business, but it could also lead to fewer market data
aggregators if the competition from the proposed consolidated market
data system makes it no longer viable for some market data aggregators
to offer their services.\1157\
[[Page 16860]]
The latter could lead to higher prices in the market data aggregator
space.\1158\ In addition, some of these market data aggregators may
choose to become competing consolidators, which could have two effects:
It could cause market data aggregators to leave the proprietary feed
aggregation space thereby reducing the competition in that space, or it
could cause market data aggregators to use the economies of scale and
the additional profits they derive from being a competing consolidator
to improve their offerings as a market data aggregator of proprietary
feeds. Depending on which effect dominates, competition in the market
data aggregator space could increase or decrease, which in turn could
lead to lower or higher prices, respectively. The Commission recognizes
that the extension of Regulation SCI to include competing consolidators
could diminish the ability of market data aggregators who become
competing consolidators to compete in the market data aggregator space.
If a market data aggregator becomes a competing consolidator, the
requirements of being an SCI entity could also extend to their
aggregation of proprietary market data.\1159\ These requirements could
raise their costs, which could reduce their ability to compete with
other market data aggregators that are not competing consolidators.
---------------------------------------------------------------------------
\1157\ The Commission acknowledges that fewer competitors could
decrease or increase efficiency in the market data aggregator
business. On the one hand, fewer competitors could reduce the
incentives for market data aggregators to innovate, which could
reduce efficiency. On the other hand, fewer competitors could also
improve efficiency if the firms that exited the market did not
aggregate market data as efficiently as the firms that remained.
\1158\ As discussed above, consolidated market data would not be
a perfect substitute for proprietary data feeds, so there would
still be demand for proprietary data. Since not all firms aggregate
proprietary data themselves, there would still be a demand for
third-party aggregators to perform this function.
\1159\ See supra Section VI.C.2(e)(ii).
---------------------------------------------------------------------------
Fourth, the Commission preliminarily expects that the expanded
content and reduced latency of core market data provided by this
proposed rule may increase competition in the broker-dealer business by
improving the ability of some broker-dealers who currently access core
data to execute orders.\1160\ It is the Commission's understanding that
some broker-dealers that do not subscribe to all of the current
proprietary DOB feeds rely solely on the exclusive SIPs today and that
this makes them uncompetitive in the market for offering execution
services to the most transaction-cost-sensitive market participants.
The new decentralized consolidation model with expanded core data would
reduce the latency and expand the information delivered to broker-
dealers who subscribe to core data, possibly without raising data
prices. This in turn would allow broker-dealers that subscribe to
consolidated data to improve their order execution services and compete
more effectively with broker-dealers who subscribe to proprietary DOB
feeds. This would lead to greater competition between broker-dealers,
which could benefit investors by resulting in lower prices for and
higher quality of broker-dealer execution services.\1161\
---------------------------------------------------------------------------
\1160\ See supra Section VI.C.4(b).
\1161\ See supra Sections VI.B.3(e), VI.C.4(b).
---------------------------------------------------------------------------
Fifth, the Commission preliminarily believes that the proposed rule
could affect competition between exchanges. As discussed above, the
proposed enhancements to core data could increase competition between
proposed consolidated market data and proprietary data feeds, which
could lead to exchanges charging lower fees for proprietary market
data.\1162\ If these lower fees do not result in more subscribers to
proprietary market data, it would lead to a decline in revenues from
proprietary market data for SROs.\1163\ Additionally, the proposed
amendments could affect competition in the market for exchange data
connectivity. If some current subscribers to proprietary market data
decide to only receive consolidated market data from competing
consolidators, they could also reduce the exchange connectivity
services that they currently use. In turn, this could reduce the
revenue that some exchanges earn from connectivity services.
Additionally, new connectivity fees may be proposed for core data use
cases, which could potentially increase or decrease the revenue
exchanges earn from connectivity.\1164\ It is the Commission's
understanding that revenues from proprietary market data and
connectivity services are a substantial portion of overall revenues for
many exchanges.\1165\ The Commission recognizes that it is possible
that an exchange group could close some or all of its exchanges if the
revenues from proposed consolidated market data did not increase and
revenues from proprietary market data and connectivity services were to
decline to a level that a given exchange or exchange group is no longer
able to cover operating expenses. The Commission is unable to quantify
the likelihood that an exchange will cease operating because it would
depend on the fees and revenue allocation for consolidated market data.
However, the Commission preliminarily believes that it is unlikely
exchanges will be forced to leave the market.
---------------------------------------------------------------------------
\1162\ See supra Section VI.C.4(a).
\1163\ In addition to adjusting fees, SROs could also redesign
their proprietary market data product lines to try and increase
revenue. However, it is possible that demand for these new products
would not be sufficient to offset the decline in revenues from
proprietary market data.
\1164\ See supra Section VI.C.4(a).
\1165\ See supra Section VI.B.3(b).
---------------------------------------------------------------------------
Even if an exchange were to exit, the Commission does not believe
this would significantly impact competition in the market for trading
services because the market is served by multiple competitors,
including off-exchange trading venues. Consequently, if an exchange
were to exit the market, demand is likely to be swiftly met by existing
competitors. The Commission recognizes that small exchanges may have
unique business models that are not currently offered by competitors,
but the Commission preliminarily believes a competitor could create
similar business models if demand were adequate, and if they did not do
so, it seems likely new entrants would do so if demand were sufficient.
Sixth, the Commission preliminarily believes that the proposed rule
would affect competition between traders.\1166\ The Commission
preliminarily believes that traders will be affected differently based
on the type of market data they use when making trading decisions.
Traders who subscribe to different types of market data can broadly be
grouped into three categories: (1) Traders who use proprietary DOB
feeds received directly from the SROs and self-aggregate, (2) traders
who use market data aggregators to aggregate proprietary DOB feeds, and
(3) traders who use core data (currently from the exclusive SIPs and,
under the proposed rule, competing consolidators).\1167\ The Commission
preliminarily believes that under the proposed rule the core data would
be of higher quality, and thus the value to traders from acquiring
proprietary DOB data would decrease.\1168\ As a result, it would be
harder for traders who use proprietary DOB feeds (both self-aggregators
and traders who use market data aggregators) to generate profits and
the competition between those traders would increase. For traders who
use core data, the Commission believes that the
[[Page 16861]]
competition between those traders would increase because the proposed
amendments would reduce the latency and expand the information included
in core data, which would allow those traders to devise better trading
strategies with bigger profit potential. The Commission preliminarily
believes that the most substantial change in competition would occur
between traders who use proprietary DOB feeds (both self-aggregators
and traders who use market data aggregators) and traders who use core
data. As described, the proposed rule expands the information and
reduces the latency of core data, thereby closing the gap between core
data and proprietary DOB feeds. This would allow traders who use core
data to compete on a more level playing field with traders who use
proprietary DOB feeds. The Commission preliminarily believes that this
would lead to a transfer of profits from traders who use proprietary
DOB feeds to traders who use proposed consolidated market data.
---------------------------------------------------------------------------
\1166\ In this context the term traders could refer to either
proprietary traders executing orders on their own behalf or broker-
dealers executing orders on behalf of their clients.
\1167\ Traders who currently subscribe to proprietary DOB feeds
may also subscribe to the exclusive SIPs as part of their backup
systems. However, the Commission preliminarily believes that these
traders primarily rely on proprietary DOB feeds when making trading
decisions because proprietary DOB feeds contain more information and
have lower latency than the exclusive SIPs.
\1168\ See supra Section VI.C.4(a).
---------------------------------------------------------------------------
Seventh, the Commission preliminarily believes that the proposed
rule changes would affect competition between off-exchange trading
venues and exchanges in the market for trading services. As discussed
above, the Commission preliminarily believes that the proposed
amendments would reduce the latency of core data.\1169\ This could
improve the competitive positions of some off-exchange trading venues
in the market for trading services. Off-exchange trading venues that
currently rely on the exclusive SIPs to calculate the NBBO would
benefit from the latency reductions in the distribution of core data
provided by the competing consolidators.\1170\ These venues would now
receive a more timely view of the NBBO, which could improve the
execution quality of trades that take place on these venues. This could
make them more attractive venues to trade on and they could attract
more order flow, from both exchanges and other off-exchange venues.
Off-exchange trading venues that currently subscribe to proprietary
data feeds could also see their competitive positions improve. If the
new core data represents a viable alternative to the proprietary data
feeds for their order executions, they could substitute core data for
proprietary data, which could lower their costs. They might be able to
pass along these cost reductions as reduced fees to subscribers, which
could improve their competitive position relative to exchanges and
other off-exchange trading venues. Reductions in the fees charged by
these off-exchange trading venues could in turn potentially benefit
investors if broker-dealers who subscribe to these venues passed along
these cost savings by, in turn, reducing their fees.\1171\
---------------------------------------------------------------------------
\1169\ See supra Section VI.C.2(c).
\1170\ Id.
\1171\ Broker-dealer subscribers could potentially pass along
the cost savings from the reduction in off-exchange trading venue
fees to investors either directly, if they reduced fees for
investors who were clients of the broker-dealer, or indirectly, if
they reduced fees for institutional clients, such as mutual funds,
who, in turn, passed along the cost savings to their end investors.
---------------------------------------------------------------------------
3. Capital Formation
The Commission preliminarily believes the proposed amendments would
have only a modest impact on capital formation. However, the Commission
is unable to quantify the effects on capital formation because, as
discussed above, it is unable to quantify the additional gains from
trade and the effects of improvements in order routing that may be
realized from the proposed amendments.\1172\ However, in the section
below the Commission provides a qualitative description of the effects
it preliminarily believes the proposed amendments would have on capital
formation and invites comments on the subject.
---------------------------------------------------------------------------
\1172\ See supra Sections VI.C.1(b), VI.D.1.
---------------------------------------------------------------------------
As discussed above, the Commission preliminarily believes that the
addition of information about odd-lot quotes, depth of book, and
auction information to core data may result in more voluntary trades
occurring between market participants, which could lead to more
efficient gains from trade.\1173\ Improved gains from trade may result
in a more efficient allocation of capital, which would improve capital
formation.
---------------------------------------------------------------------------
\1173\ See supra Section VI.D.1.
---------------------------------------------------------------------------
Additionally, the Commission preliminarily believes that the
proposed amendments would improve order execution for market
participants who currently rely upon SIP data, which may lower their
transaction costs.\1174\ Lower transaction costs could reduce firms'
cost of raising capital.\1175\ This, in turn could improve capital
formation.
---------------------------------------------------------------------------
\1174\ See supra Sections VI.C.1(b), VI.D.1.
\1175\ See Yakov Amihud and Haim Mendelson, Asset Pricing and
the Bid--Ask Spread, 17 J. Fin. Econ. 223 (1986).
---------------------------------------------------------------------------
4. Request for Comments on Impact on Efficiency, Competition, and
Capital Formation
The Commission requests comments on its analysis of the impact of
the proposed amendments on efficiency, competition, and capital
formation. In particular, the Commission solicits comment on the
following:
276. Do you agree with the Commission's analysis of the effects the
proposed amendments might have on efficiency, competition and capital
formation? Why or why not? Please explain in detail.
277. Do you believe the proposed amendments may have unintended
consequences that are not captured by the Commission's analysis of the
effects the proposed amendments may have on efficiency, competition and
capital formation? Why or why not? Please explain in detail.
278. Do you agree that the proposed amendments would lead to gains
from trade? Do you agree that the proposed amendments would improve the
efficiency or order execution? Do you agree that the proposed
amendments would improve price efficiency? Do you agree that the
proposed amendments would improve the efficiency of how core data is
distributed? Please explain.
279. To what extent does the gap in information between SIP data
and proprietary DOB products affect price efficiency? Are these effects
larger in less actively traded securities where the gap in information
between SIP data and proprietary DOB products is larger? Please explain
in detail.
280. Do you believe the proposed amendments would have effects on
efficiency that the Commission has not recognized? Please explain in
detail.
281. Do you agree with the Commission's analysis that the proposal
will have a substantial impact on competition in several markets? In
particular, do you agree that the decentralized consolidation model
improves the competition in the market to distribute consolidated
market data? Do you agree that the decentralized consolidation model
creates more viable substitutes for proprietary exchange data? Do you
agree that the proposal increases competition to provide smart order
routing? Do you agree that the proposal could affect competition among
exchanges to provide transaction services? Do you agree that the
proposal could affect competition among traders? Do you agree that the
proposal could affect competition among exchanges and off-exchange
trading venues? Please explain in detail.
282. Do you agree that the public disclosure of Form CC and the
performance metrics promote competition more than if such information
were not disclosed? Please explain.
283. Do you agree that the extension of Regulation SCI to include
competing consolidators could raise the barriers to entry for competing
consolidators and reduce competition in the competing
[[Page 16862]]
consolidator market? Why or why not? Please explain in detail.
284. Do you agree that the purchase of consolidated market data
from a competing consolidator by the CAT would not have a significant
effect on competition among competing consolidators? Why or why not?
Please explain in detail.
285. Would the public disclosure of Form CC or the performance
metrics risk revealing any trade secrets that could harm competition?
Please explain.
286. Do you believe the proposed amendments would have effects on
competition that the Commission has not recognized? Please explain in
detail.
287. Do you agree that the proposal would only have a modest impact
on capital formation? Why or why not? Please explain in detail.
288. Do you believe the proposed amendments would have effects on
capital formation that the Commission has not recognized? Please
explain in detail.
E. Alternatives
The Commission considered potential alternatives to the proposed
amendments that broadly fall into two categories: Introduce the
decentralized consolidation model and make alternative changes to the
core data definition, and make changes in the core data definition as
proposed in the amendments and consider alternative models of SIP
competition.
1. Introduce Decentralized Consolidation Model With Additional Changes
in Core Data Definition
The Commission considered an alternative that would introduce the
decentralized consolidation model and expand core data more than the
proposal does. For example, the Commission considered expanding core
data to include information on quotations and aggregate size at all
prices in the limit order book (``full depth of book'') in addition to
the depth of book information contained in the proposal, i.e., five
price levels from the protected quotes.\1176\ Alternatively, the
Commission considered expanding core data to include information on all
odd-lot sized quotes instead of only information on quotes at or above
the proposed round lot size.\1177\ Under both alternatives, the
definition of a round lot for the purposes of determining the NBBO and
a protected quote would remain the same as in the proposed amendments,
which means the costs and benefits associated with the changes in the
definition of the NBBO and protected quotes would be similar to the
proposal.\1178\
---------------------------------------------------------------------------
\1176\ See supra Section III.C.2.
\1177\ See supra Section III.C.1.
\1178\ See supra Section VI.C.1(c).
---------------------------------------------------------------------------
Relative to the proposal, full depth of book information would
provide market participants who currently do not access proprietary DOB
feeds, as well as market participants who currently access proprietary
DOB feeds and would have switched to using consolidated market data
under the proposal, with additional information on liquidity provision
across more price levels. To the extent that these market participants
can utilize full depth of book information, the Commission
preliminarily believes that this alternative could result in increased
benefits to such market participants relative to the proposal.\1179\
Certain commenters on the Roundtable stated that without full depth of
book information, broker-dealers may not be able to provide best
execution to their clients,\1180\ indicating that full depth of book
information would provide valuable information to market participants.
However, as discussed above, the Commission preliminarily believes that
the marginal benefit of including additional information on price
levels further away from the best quotes may decrease as the price
level moves away from the best quote because orders at these price
levels are less likely to execute.\1181\
---------------------------------------------------------------------------
\1179\ This alternative could increase costs relative to the
proposal for market participants that access full depth of book
information and execute trading that earn profits at the expense of
other market participants who do not access this information. As
discussed above, this cost would represent a partial transfer from
traders who currently have access to depth of book to those who do
not. See supra Section VI.C.1(b)(iv).
\1180\ See supra notes 284-285.
\1181\ See supra Sections VI.C.1(b)(ii), III.C.2.
---------------------------------------------------------------------------
Relative to the proposal, the inclusion of full depth of book
information in core data would increase the ability of market
participants to use it as a substitute for proprietary DOB feeds.\1182\
Currently, market participants interested in full depth of book data
rely on proprietary DOB feeds offered by exchanges, which provide
varying degrees of the depth of book information. To the extent that
there are market participants who utilize full depth of book
information via proprietary DOB feeds in trading, this alternative
could increase the benefits for some of these market participants
relative to the proposal by potentially reducing their data costs if
they would switch to using core data under this alternative but would
not have done so under the proposal. Subscribers of proprietary DOB
feeds would realize these cost savings if they switched to receiving
proposed consolidated market data through a competing consolidator or
if they registered as a self-aggregator.\1183\
---------------------------------------------------------------------------
\1182\ Including full depth of book information in core data
would not make it a perfect substitute for all proprietary DOB
feeds. For example, some proprietary DOB feeds contain more detailed
information than full depth of information, such as messages on
individual orders.
\1183\ See supra Section VI.C.2(b).
---------------------------------------------------------------------------
The Commission preliminarily believes that the alternative to
include full depth of the book in core data would result in greater
costs for exchanges than would the proposal. To the extent that the
alternative results in fewer market participants subscribing to
proprietary DOB data or purchasing connectivity services from the
exchanges than under the proposal, exchanges' business for their
proprietary feeds and connectivity services could be less
profitable.\1184\ Additionally, to the extent that not all exchanges
sell full depth of book, certain exchanges would incur additional costs
to set up systems and produce full depth of book information to be
included in the core data. However, the Commission is unable to
quantify this cost because it lacks information on the modifications
exchanges would need to make to their systems in order to provide full
depth of book information, but the Commission invites comments on the
issue.
---------------------------------------------------------------------------
\1184\ More broadly, this could have differential effects
between exchanges who derive significant revenue from proprietary
data feeds and those who derive significant revenue primarily from
SIP revenue. These effects would also depend on the NMS plan(s) fees
for consolidated market data as well as their method for allocating
revenue received from consolidated market data among the SROs. See
supra Section VI.C.4(a).
---------------------------------------------------------------------------
Compared to the proposal, this alternative could result in
additional costs for competing consolidators to create infrastructure
and expand capacity to distribute full depth of book information.\1185\
The costs are likely to vary substantially according to the existing
infrastructure of the entity seeking to be a competing consolidator.
The Commission preliminarily believes that these incremental costs for
market data aggregators and existing exclusive SIPs will be small,
because they already work with proprietary DOB data. However, the
Commission invites comments on the issue.
---------------------------------------------------------------------------
\1185\ See supra Section VI.C.2(d).
---------------------------------------------------------------------------
Additionally, including full depth of book information would
require market participants who subscribed to core data and wished to
receive the additional depth of book information to make more extensive
upgrades to their systems than
[[Page 16863]]
under the proposal. However, the Commission is unable to estimate the
associated costs because it does not have access to information about
the infrastructure expenses a market participant incurs to process
market data and because of the likelihood that such costs vary
substantially according to the existing infrastructure of the market
participant, but the Commission invites comments on the issue. To the
extent that some market participants who subscribe to the exclusive
SIPs do not need full depth of book information, they would not need to
expand their own proprietary technology or that of a third-party vendor
to process the full depth of the book data. Therefore, this alternative
would not result in additional costs for these market participants
compared to the proposal.
In addition to the alternative of adding full depth of book
information, the Commission also considered expanding core data to
include information on all odd-lot sized quotes instead of only
information on quotes at or above the proposed round lot size.\1186\
The proposed rule is specifically designed to leave out odd-lot quotes
for low priced stocks. Under this alternative, market participants who
subscribe to core data would have odd-lot information for low priced
stocks. Furthermore, compared to the proposal, this alternative would
provide market participants who subscribe to core data with more
detailed information about at which prices odd-lot liquidity exists
(i.e., instead of rolling up odd-lot quotes at different prices to the
highest price) for higher priced stocks. To the extent that market
participants who currently do not have access to this information
utilize the more detailed odd-lot information in order routing and
execution, this alternative could improve their execution quality
relative to the proposal.\1187\ However, as discussed above,\1188\
Commission and commenter analysis shows that there is a higher
percentage of odd-lot trades in higher priced stocks. This could imply
that there are fewer odd-lot quotes present in low priced stocks, which
could mean that the marginal benefit of including odd-lot information
in low priced stocks may be smaller than including it in stocks with
higher prices.
---------------------------------------------------------------------------
\1186\ See supra Section III.C.1.
\1187\ This alternative could increase costs relative to the
proposal for market participants that access all odd-lot quotes and
execute trading that earn profits at the expense of other market
participants who do not access this information. As discussed above,
this cost would represent a partial transfer from traders who
currently have access to all odd-lot quotes to those who do not. See
supra Section VI.C.1(b)(iv).
\1188\ See supra note 178 and accompanying text.
---------------------------------------------------------------------------
The Commission preliminarily believes that the inclusion of all
odd-lot data would not significantly change the processing costs for
competing consolidators relative to the proposal. Under the current
proposal, competing consolidators would already be processing all odd-
lot data in order to calculate exchange round lot BBOs and the round
lot NBBO that would be contained in the proposed core market data.
Competing consolidators may incur some additional infrastructure
expenses in order to disseminate the additional message volume
associated with all odd-lot information to market participants. These
costs are likely to vary according to the existing infrastructure of
the entity seeking to be a competing consolidator, but the Commission
preliminarily believes that these additional infrastructure costs are
likely to be small.\1189\ However, the Commission invites comments on
the issue.
---------------------------------------------------------------------------
\1189\ See supra Section VI.C.2(d).
---------------------------------------------------------------------------
Additionally, the Commission preliminarily estimates that market
participants and data vendors would need to make additional upgrades to
their systems beyond the proposal in order to receive the additional
odd-lot data. However, the Commission does not have access to
information about the infrastructure expenses a market participant
incurs to process market data and because of the likelihood that such
costs vary substantially according to the existing infrastructure of
market participants, but the Commission invites comments on the issue.
2. Introduce Changes in Core Data and Introduce a Distributed SIP Model
The Commission considered an alternative that would expand the core
data as proposed and would introduce a distributed SIP model whereby
the current exclusive SIP processors would establish multiple instances
of their systems in multiple data centers.\1190\ As some commenters and
panelists suggested at the Roundtable,\1191\ this alternative would
achieve a similar reduction in exclusive SIP geographic latency to the
proposal by allowing firms to consume data under the current structure
without making any changes or to consume data at the nearest exclusive
SIP instance depending on the firms' latency concerns. However, this
alternative would still provide exclusive rights to one operator to
provide exclusive SIP services for a given tape.
---------------------------------------------------------------------------
\1190\ See also a discussion about a single SIP alternative,
supra Section IV.C.2.
\1191\ See supra Section IV.C.1(a).
---------------------------------------------------------------------------
This Commission preliminarily believes that this alternative would
produce lower benefits compared to the proposed decentralized
consolidation model.\1192\ Under this alternative, the exclusive SIPs
would not be subject to the same competitive forces that competing
consolidators may be subject to under the decentralized consolidation
model.\1193\ This lack of competition would reduce the incentives to
innovate and would not improve efficiency or reduce the transmission
and aggregation latencies of core data as much as the proposal. If core
data does not achieve the same overall latency reduction as under the
proposal, then market participants would be less likely to substitute
using core data for proprietary data than they would be under the
proposal. This could mean that the decline in profits from exchanges'
proprietary data fees may not be as large as they would be under the
proposal.\1194\
---------------------------------------------------------------------------
\1192\ See supra Sections VI.C.2, IV.C.1.
\1193\ See supra Sections VI.C.2, VI.D.2.
\1194\ See supra Section VI.C.4(a).
---------------------------------------------------------------------------
Under this alternative, the exclusive SIPs would still need to make
upgrades to their systems to account for the expansion of core data and
would still need to install systems in multiple data centers. The
Commission preliminarily believes that the costs of these SIP system
upgrades would be similar to those under the proposal.\1195\ However,
under this alternative, market participants may experience higher costs
to access core data compared to the proposal. Instead of having the
option to receive all core data from one competing consolidator, as
they would under the proposal, market participants would still need to
receive data from both exclusive SIP plan processors.\1196\ This means
that under this alternative, the total price market participants would
pay to access core data may be greater than under the proposal because
it would include the costs of the two plan processors to aggregate and
transmit the data. Under the proposal, the total price market
participants would pay to receive core data may only include the costs
of one processor, because market participants would have the option to
receive all of their core data from one competing consolidator.\1197\
---------------------------------------------------------------------------
\1195\ See supra Section VI.C.2(d).
\1196\ See supra Section VI.B.2.
\1197\ See supra Section VI.C.2(c).
---------------------------------------------------------------------------
[[Page 16864]]
3. Require Competing Consolidators' Fees B e Subject to the
Commission's Approval
The Commission considered an alternative to the decentralized
consolidation model that would require competing consolidators' fees to
be subject to the Commission's regulatory approval.
The Commission preliminarily believes that, relative to the
proposal, this alternative would potentially reduce the risk and
uncertainty surrounding the total price of consolidated market data.
This alternative would provide for Commission review and approval of
the fees of competing consolidators. Therefore, compared to the
proposal, this alternative could reduce the risk that market
participants are exposed to unreasonable fees, which could reduce the
risk that some market participants or data vendors would no longer
provide services in the equity market because the price of consolidated
market data becomes too high.\1198\
---------------------------------------------------------------------------
\1198\ See supra Section VI.C.2(d).
---------------------------------------------------------------------------
The Commission preliminarily believes, however, that this
alternative would impose additional regulatory burdens on the competing
consolidator business compared to the proposal, and may inhibit
competing consolidators from being able to respond effectively and
quickly to free market forces. These burdens would reduce the incentive
for firms to become competing consolidators and lead to less robust
competition in the decentralized consolidation model than under the
proposal.\1199\ With less competitive forces to discipline competing
consolidators' service fees, competing consolidators' would have less
incentive to innovate in their consolidating business. Moreover, less
competing consolidators in the market would reduce the extent to which
the pricing is based on market forces.
---------------------------------------------------------------------------
\1199\ See supra Section VI.C.2(a).
---------------------------------------------------------------------------
4. Do Not Extend Regulation SCI To Include Competing Consolidators
The Commission considered an alternative that would not extend
Regulation SCI to include competing consolidators. Under this
alternative, the Commission would have required competing consolidators
to establish, maintain, and enforce written policies and procedures
reasonably designed to ensure that its systems involved in the
collection, consolidation, and dissemination of consolidated market
data have levels of capacity, integrity, resiliency, availability, and
security adequate to maintain operational capability and to assure the
prompt, accurate, and reliable delivery of consolidated market data.
These policies and procedures could address, among other things, data
security and integrity; reasonable current and future capacity
estimates; business continuity and disaster recovery plans; periodic
capacity stress tests of critical systems; procedures to review and
keep current system development and testing methodology; periodic
reviews to assess the vulnerability of its systems and operations to
internal and external threats, physical hazards, and natural disasters;
and an annual independent audit to ensure that these requirements are
satisfied, together with a review by senior management of a report
containing the commendations and conclusions of the independent review.
The Commission preliminarily believes that this alternative would
reduce some of the benefits as well as some of the costs compared to
extending Regulation SCI to include competing consolidators.\1200\
---------------------------------------------------------------------------
\1200\ See supra Section VI.C.2(e).
---------------------------------------------------------------------------
The Commission preliminarily believes that this alternative could
result in some competing consolidators producing systems that would be
less secure and resilient than they would be under the proposed
amendments because they would not be subject to all of the requirements
of being an SCI entity.\1201\ If competing consolidators produce less
secure and resilient systems compared to if they were SCI entities,
then there could be a greater risk of more market disruptions due to
systems issues in competing consolidators compared to the proposed
amendments.\1202\ Additionally, if a competing consolidator does
experience a systems issue, it could result in more severe and longer
disruptions compared to the proposed amendments. However, the increase
in competing consolidator systems issues compared to the proposal may
not be significant. Under this alternative, competing consolidators
would still have to establish policies and procedures to ensure that
their systems have levels of capacity, integrity, resiliency,
availability, and security adequate to maintain operational capability.
They would also still need to post information on systems issues on
their websites as well as monthly reports containing statistics on
their capacity and systems availability.\1203\ This would place
competitive pressure on competing consolidators to ensure that their
systems are reliable and resilient. Otherwise, they could lose
subscribers to competing consolidators that had more reliable and
resilient systems.
---------------------------------------------------------------------------
\1201\ See supra Section VI.C.2(e)(i).
\1202\ Id.
\1203\ See supra Section VI.C.3(a).
---------------------------------------------------------------------------
The Commission preliminarily believes that this alternative would
result in lower costs for some competing consolidators compared to the
proposed amendments. Under this alternative, competing consolidators
would not incur the costs that are associated with SCI entities that
are discussed above.\1204\ Instead, the Commission preliminarily
estimates that requiring a competing consolidator to establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that its systems involved in the collection,
consolidation, and dissemination of consolidated market data have
levels of capacity, integrity, resiliency, availability, and security
adequate to maintain operational capability and to assure the prompt,
accurate, and reliable delivery of consolidated market data would
require an average initial expense of $68,710 per competing
consolidator.\1205\ The Commission based these estimates upon those it
used with regards to establishing similar policies and procedures for
Security-Based Swap Data Repository Registration, Duties and Core
Principles.\1206\ Once these policies and procedures are established,
the Commission preliminarily estimates that, on average, a competing
consolidator will incur an ongoing cost of $21,810 annually to maintain
these policies and procedures.\1207\
---------------------------------------------------------------------------
\1204\ See supra Section VI.C.2(e)(ii).
\1205\ The Commission estimates a total of 210 initial burden
hours per competing consolidator. The Commission estimates a total
monetized initial burden of $68,710 per competing consolidator. The
Commission derived this estimate based on per hour figures from
SIFMA's Management & Professional Earnings in the Securities
Industry 2013, modified by Commission staff to account for an 1,800-
hour work-year and inflation, and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead: [(Compliance
Manager at $310 for 80 hours) + (Attorney at $417 for 80 hours) +
(Sr. Systems Analyst at $285 for 25 hours) + (Operations Specialist
at $137 for 25 hours)] = 210 initial burden hours per competing
consolidator and $68,710.
\1206\ See Securities Exchange Act Release No. 74246, supra note
554, at 14523; 17 CFR 242.13n-6.
\1207\ The Commission preliminarily estimates that it will take,
on average, 60 annual hours to maintain these policies and
procedures per competing consolidator. The Commission estimates the
monetized burden for this requirement to be $21,810. The Commission
derived this estimate based on per hour figures from SIFMA's
Management & Professional Earnings in the Securities Industry 2013,
modified by Commission staff to account for an 1,800-hour work-year
and inflation, and multiplied by 5.35 to account for bonuses, firm
size, employee benefits and overhead: [(Compliance Manager at $310
for 30 hours) + (Attorney at $417 for 30 hours)] = 60 annual burden
hours per competing consolidator and $21,810.
---------------------------------------------------------------------------
[[Page 16865]]
The Commission preliminarily believes that, compared to the
proposed amendments, this would lower the barriers to entry for new
competing consolidators who are not currently SCI entities, including
market data aggregators.\1208\ This could result in more firms becoming
competing consolidators and could increase competition in the competing
consolidator market compared to the proposal. Increased competition
could lower the costs and increase the speed and quality of
consolidated market data compared to the proposed amendments. This, in
turn, could make consolidated market data a more viable substitute for
proprietary data feeds and result in greater competition between
consolidated market data and proprietary data feeds compared to the
proposed amendments.
---------------------------------------------------------------------------
\1208\ See supra Sections VI.C.2(a)(i)b., VI.D.2.
---------------------------------------------------------------------------
5. Require Competing Consolidators To Submit Form CC in the EDGAR
System Using the Inline XBRL Format
The Commission considered the alternative of requiring competing
consolidators to submit Form CC using the Commission's EDGAR system and
using the Inline XBRL format. Requiring this could create benefits for
market participants by enabling more efficient retrieval, aggregation
and analysis of disclosed information and facilitating comparisons
across competing consolidators. This alternative also could allow a
competing consolidator to efficiently benchmark key aspects of its
operations (e.g., operational capabilities or fee structures) against
the rest of the potential competing consolidator population. However,
the benefits to market participants of efficient aggregation and
comparison and the benefits to potential competing consolidators of
efficient benchmarking depend on the number of competing consolidators
that ultimately register with the Commission, which we estimate to be
relatively low at twelve.
Additionally, many potential competing consolidators may not be
familiar with Inline XBRL and thus could incur increased costs if they
need to learn Inline XBRL compared to the proposal's requirement to
submit Form CC and various exhibits through EFFS--a system with which
we believe many potential competing consolidators are already familiar.
However, to the extent that potential competing consolidators already
have experience filing information in EDGAR in an XML format, costs
associated with learning a new system and format may be mitigated. We
request comment on the specific benefits and costs of filing Form CC in
EDGAR using the Inline XBRL format.
6. Require Competing Consolidators To Submit Monthly Disclosures in the
EDGAR System Using the Inline XBRL Format
The Commission considered the alternative of requiring competing
consolidators to submit their monthly performance metrics and
operational information using the Commission's EDGAR system and using
the Inline XBRL format. This alternative could create benefits for
market participants by having the monthly information of each competing
consolidator in a centralized location. Additionally, it could allow
for more efficient retrieval, aggregation and analysis of disclosed
information and facilitate comparisons across competing consolidators
and time periods. To the extent there are a small number of potential
competing consolidators, the magnitude of such benefits would be
reduced.
Additionally, competing consolidators would incur increased costs
to file the information with the Commission compared to the proposal's
requirement to post the monthly information on the competing
consolidator's website in any format. The difference in costs would
likely vary across competing consolidators, depending on the systems
and processes they currently have in place, such as for internal
reporting, posting of website updates, and submission of regulatory
filings, and the manner in which competing consolidators currently
maintain data required for the additional disclosures.
In addition, similar to submitting Form CC information on EDGAR
using the Inline XBRL format, competing consolidators may need to learn
Inline XBRL. We request comment on the specific benefits and costs of
filing the monthly disclosures in EDGAR using the Inline XBRL format.
7. Prescribing the Format of NMS Information
The Commission considered an alternative in which it would
prescribe a single format that SROs would use to provide NMS
information to competing consolidators and self-aggregators. Each SRO
would still be required to make all methods of access available to
competing consolidators and self-aggregators as such SRO makes
available to any other person.\1209\ Each SRO would still be able to
offer proprietary data products in other formats.
---------------------------------------------------------------------------
\1209\ See supra note 428.
---------------------------------------------------------------------------
By prescribing the format, the Commission could better ensure
consistency of the data. Compared to the proposal, a standard format
could reduce the costs for competing consolidators and self-aggregators
to aggregate the data to create consolidated market data. However, the
Commission preliminarily believes that these costs may not be
significantly reduced. As discussed above, the SROs currently use a
variety of formats for their proprietary data feeds and some broker-
dealers, market data aggregators, and the SIPs are already adept and
experienced in aggregating and normalizing the data across different
formats.\1210\ Therefore, some potential competing consolidators and
self-aggregators may not experience significant cost reductions
relative to the proposal if the Commission required that SROs provide
NMS information in a prescribed format.
---------------------------------------------------------------------------
\1210\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------
Requiring a single format for SROs to deliver NMS information to
competing consolidators and self-aggregators would also increase the
costs to SRO's compared to the proposal. SROs would incur a greater
cost to conform their existing data to a format they do not already
use. It could also increase the costs of exchanges making future
changes to their data because they may need to make alterations to both
their proprietary data products and to data in the standard format they
would supply to competing consolidators and self-aggregators, assuming
the changes would need to be included in consolidated market data.
Additionally, compared to the proposal, this increased cost could
reduce the likelihood that the effective NMS plan(s) for NMS stocks or
SROs introduce additional elements into consolidated data in the
future.\1211\
---------------------------------------------------------------------------
\1211\ See supra Sections III.C, III.D.
---------------------------------------------------------------------------
Requiring the SROs to deliver data to competing consolidators and
self-aggregators in a single format could also impact the latency
between consolidated market data and aggregated proprietary DOB feeds.
On the one hand, receiving all of the data in a single format should
expedite the aggregation and normalization process for consolidated
data. This could potentially reduce the latency differential between
consolidated market data and aggregated proprietary data feeds compared
to the proposal. However, it is possible that the format of certain
proprietary data feeds may allow for faster aggregation initially than
the single format specified by the Commission because of certain SROs'
[[Page 16866]]
existing familiarity with its format. If this occurred, it could
increase the latency differential compared to the proposal.
In addition, if the SROs are required to transform their existing
data to a different format, it could hinder the timeliness of the data
competing consolidators receive compared to data delivered via the
proprietary feeds. Any changes in the timeliness with which the
competing consolidators receive the data or any difference in latency
between consolidated core data and proprietary data feeds would affect
the viability of consolidated core data as a substitute for proprietary
data feeds and affect many of the benefits of the decentralized
consolidation model.\1212\ If the latency differential is reduced, more
market participants may substitute consolidated market data for
proprietary data feeds and the benefits of the decentralized
consolidation model could increase compared to the proposal. If
competing consolidators receive less timely data or the latency
differential increases, fewer market participants would switch to
consolidated market data and the benefits would be smaller than under
the proposal.
---------------------------------------------------------------------------
\1212\ See supra Section VI.C.2(c).
---------------------------------------------------------------------------
8. Request for Comments on Alternatives
The Commission requests comments on its analysis of alternatives to
the proposed amendments. In particular, the Commission solicits comment
on the following:
289. Should the Commission adopt an alternative approach? Why or
why not? What alternatives should the Commission consider? What are the
benefits and costs of such an approach? Please explain in detail.
290. Do you agree with the Commission's analysis of the alternative
to further increase the content of core data to include the full depth
of book and/or all odd-lot quotes? Would additional depth of book
information, beyond what is include in the proposal, be valuable? Why
or why not? How much larger would consolidated market data be if it
included the full depth of book and/or all odd-lots? How much larger
than the proposal would the costs of this alternative be for exchanges,
competing consolidators, and other market participants? Please provide
estimates, if possible.
291. Do you agree with the Commission's analysis of the distributed
SIP alternative? Why or why not? Please explain. How would the
competitive effects of the distributed SIP alternative compare to the
competitive effects of the proposed decentralized consolidated model?
As such, how would the benefits of the distributed SIP model compare to
the benefits of the decentralized consolidation model? How would the
costs of the distributed SIP model compare to the costs of the
decentralized consolidation model? How would the distributed SIP model
affect aggregate data fees paid by market participants for market data?
How would the distributed SIP model affect the types of products and
services available to purchase consolidated data?
292. Do you agree with the Commission's analysis of the relative
economic effects of the alternative to not extend Regulation SCI to
include competing consolidators? Why or why not? Please explain. Would
this alternative increase the risk of a competing consolidator
experiencing a system disruption? If so, how economically significant
would this increase be? Would this alternative lower the barriers to
entry for competing consolidators compared to the proposed amendments?
Would this alternative result in more new competing consolidators?
Would this alternative increase competition among competing
consolidators? Would this alternative increase innovation in the
competing consolidator market? Would this alternative increase
competition between consolidated market data and proprietary depth of
book feeds? Please explain and provide estimates if possible.
293. Do you agree with the Commission's analysis of the relative
economic effects of the alternative to require that competing
consolidator fees be subject to Commission approval? Why or why not?
Please explain. Should the Commission be concerned that the proposal
does not require an approval process for competing consolidators'
market data fees? What is the risk and how large is that risk? Would
the alternative reduce this risk? If so, how economically significant
would this reduction be? How burdensome would it be for competing
consolidators to have to obtain Commission approval for their fees?
Please explain and provide cost estimates if possible.
294. Do commenters agree with the Commission's analysis of the
alternative to require all disclosures be filed in the EDGAR system
using the Inline XBRL format? Why or why not? Please explain in detail.
Would the alternative further help market participants evaluate and
compare the merits of competing consolidators? Would the alternative
promote consistency relative to the proposal? Would the disclosures be
more accessible in EDGAR than if they were on the Commission's website
or on competing consolidators' websites? Please explain in detail. What
are the costs of using EDGAR and the Inline XBRL format relative to the
proposal? Please explain and provide estimates if possible.
295. Do you agree with the Commission's analysis of the relative
economic effects of the alternative in which the Commission would
prescribe a single format that SROs would use to provide NMS
information to competing consolidators and self-aggregators? Why or why
not? Please explain. What effects would the Commission prescribing NMS
information be provided in a single format have on the costs of SROs,
competing consolidators, and self-aggregators? How economically
significant would these effects be? What effects would the alternative
have on the latency of consolidated market data compared to aggregated
proprietary data feeds? What effects would the alternative have on the
timeliness of the data competing consolidators and self-aggregators
would receive? Please explain and provide estimates if possible.
296. Are there other reasonable alternatives for the proposed
amendments to Regulation NMS to update the content of the consolidated
market data and introduce competition into the distribution of that
consolidated market data? If so, please provide additional alternatives
and how their costs and benefits, as well as their potential impacts on
the promotion of efficiency, competition, and capital formation, would
compare to the impact of the proposed amendments.
297. Is the competing consolidator approach necessary to achieve
the economic benefits of the proposal related to expanding consolidated
market data? Are there alternatives to the decentralized consolidation
model with competing consolidators that would achieve the Commission's
objectives at lower cost? If so, how would their costs and benefit
compare to the proposed decentralized consolidation model? Please
explain and provide estimates if possible.
F. Request for Comments on the Economic Analysis
The Commission is sensitive to the potential economic effects,
including the costs and benefits, of the proposed amendments to
Regulation NMS to update the content of core data and introduce the
decentralized consolidation model into the distribution of consolidated
market data. The Commission has identified
[[Page 16867]]
above certain costs and benefits associated with the proposal and
requests comment on all aspects of its preliminary economic analysis,
including with respect to the specific questions posed above. The
Commission encourages commenters to identify, discuss, analyze, and
supply relevant data, information, or statistics regarding any such
costs or benefits.
VII. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\1213\ the Commission requests comment on the
potential effect of the proposed amendments on the United States
economy on an annual basis. The Commission also requests comment on any
potential increases in costs or prices for consumers or individual
industries, and any potential effect on competition, investment, or
innovation. Commenters are requested to provide empirical data and
other factual support for their views to the extent possible.
---------------------------------------------------------------------------
\1213\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------
VIII. Regulatory Flexibility Certification
The Regulatory Flexibility Act (``RFA'') \1214\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \1215\ of the Administrative
Procedure Act,\1216\ as amended by the RFA, generally requires the
Commission to undertake a regulatory flexibility analysis of all
proposed rules, or proposed rule amendments, to determine the impact of
such rulemaking on ``small entities.'' \1217\ Section 605(b) of the RFA
states that this requirement shall not apply to any proposed rule or
proposed rule amendment which, if adopted, would not have a significant
economic impact on a substantial number of small entities.\1218\
---------------------------------------------------------------------------
\1214\ 5 U.S.C. 601 et seq.
\1215\ 5 U.S.C. 603(a).
\1216\ 5 U.S.C. 551 et seq.
\1217\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10.
\1218\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------
The proposed rule would apply to national securities exchanges
registered with the Commission under Section 6 of the Exchange Act,
national securities associations registered with the Commission under
Section 15A of the Exchange Act, and competing consolidators. None of
the exchanges registered under Section 6 that would be subject to the
proposed amendments are ``small entities'' for purposes of the
RFA.\1219\ There is only one national securities association, and the
Commission has previously stated that it is not a small entity as
defined by 13 CFR 121.201.\1220\ For purposes of the Commission
rulemaking in connection with the RFA \1221\ as it relates to competing
consolidators, a small entity includes a SIP that ``(1) Had gross
revenues of less than $10 million during the preceding fiscal year (or
in the time it has been in business, if shorter); (2) Provided service
to fewer than 100 interrogation devices or moving tickers at all times
during the preceding fiscal year (or in the time that it has been in
business, if shorter); and (3) Is not affiliated with any person (other
than a natural person) that is not a small business or small
organization under this section.'' \1222\ The Commission preliminarily
believes that no competing consolidators would be ``small entities''
for purposes of the RFA.
---------------------------------------------------------------------------
\1219\ See 17 CFR 240.0-10(e). Paragraph (e) of Rule 0-10 states
that the term ``small business,'' when referring to an exchange,
means any exchange that has been exempted from the reporting
requirements of Rule 601 of Regulation NMS, 17 CFR 242.601, and is
not affiliated with any person (other than a natural person) that is
not a small business or small organization as defined in Rule 0-10.
Under this standard, none of the exchanges subject to the proposed
amendment to Rule 608 is a ``small entity'' for the purposes of the
RFA. See also Securities Exchange Act Release Nos. 82873 (Mar. 14,
2018), 83 FR 13008, 13074 (Mar. 26, 2018) (File No. S7-05-18)
(Transaction Fee Pilot for NMS Stocks Proposed Rule); 55341 (May 8,
2001), 72 FR 9412, 9419 (May 16, 2007) (File No. S7-06-07) (Proposed
Rule Changes of Self-Regulatory Organizations Proposing Release).
\1220\ See, e.g., Securities Exchange Act Release No. 62174 (May
26, 2010), 75 FR 32556, 32605 n.416 (June 8, 2010) (``FINRA is not a
small entity as defined by 13 CFR 121.201.'').
\1221\ See supra note 1217.
\1222\ 17 CFR 240.0-10(g).
---------------------------------------------------------------------------
For the above reasons, the Commission certifies that the proposed
amendments to Rules 600 and 603 and the new Rule 614, if adopted, would
not have a significant economic impact on a substantial number of small
entities for purposes of the RFA.
The Commission invites commenters to address whether the proposed
rules would have a significant economic impact on a substantial number
of small entities, and, if so, what would be the nature of any impact
on small entities. The Commission requests that commenters provide
empirical data to support the extent of such impact.
IX. Statutory Authority
Pursuant to the Exchange Act, and particularly Sections 3(b), 5, 6,
11A, 15, 17, and 23(a) thereof, 15 U.S.C. 78c, 78e, 78f, 78k-1, 78o,
78q, and 78w(a), the Commission proposes to amend Sections 240.3a51-1,
240.13h-1, 242.105, 242.201, 242.204, 242.600, 242.602, 242.603,
242.611, and 242.1000 of Chapter II of Title 17 of the Code of Federal
Regulations and proposes Rule 614, as set forth below.
List of Subjects
17 CFR Part 240
Brokers, Dealers, Registration, Securities.
17 CFR Part 242 and 249
Brokers, Reporting and recordkeeping requirements, Securities.
For the reasons stated in the preamble, the Commission is proposing
to amend title 17, Chapter II of the Code of Federal Regulations as
follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
Pub. L. 111-203, 939A, 124 Stat. 1376, (2010); and Pub. L. 112-106,
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
Sec. 240.3a51-1 [Amended].
0
2. In Sec. 240.3a51-1, amend paragraph (a) by removing the text
``Sec. 242.600(b)(48)'' and adding in its place ``Sec.
242.600(b)(55)''.
Sec. 240.13h-1 [Amended].
0
3. In Sec. 240.13h-1, amend paragraph (a)(5) by removing the text
``Sec. 242.600(b)(47)'' and adding in its place ``Sec.
242.600(b)(54)''.
PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES
0
4. The authority citation for part 242 continues to read as follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a),
[[Page 16868]]
78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 80a-37.
Sec. 242.105 [Amended].
0
5. Amend Sec. 242.105 by:
0
a. In paragraph (b)(1)(i)(C) removing the text ``Sec. 242.600(b)(23)''
and adding in its place ``Sec. 242.600(b)(29)'' and
0
b. In paragraph (b)(1)(ii) removing the text ``Sec. 242.600(b)(68)''
and adding in its place ``Sec. 242.600(b)(76)''.
Sec. 242.201 [Amended].
0
6. Amend Sec. 242.201 by:
0
a. In paragraph (a)(1) removing the text ``Sec. 242.600(b)(48)'' and
adding in its place ``Sec. 242.600(b)(55)'';
0
b. In paragraph (a)(2) removing the text ``Sec. 242.600(b)(23)'' and
adding in its place ``Sec. 242.600(b)(29)'';
0
c. Amending paragraph (a)(3) by removing the text ``the term ``listing
market'' as defined in the effective transaction reporting plan for the
covered security'' and adding in its place ``the term ``primary listing
exchange'' as defined in Sec. 242.600(b)(67)'';
0
d. In paragraph (a)(4) removing the text ``Sec. 242.600(b)(43)'' and
adding in its place ``Sec. 242.600(b)(50)'';
0
e. In paragraph (a)(5) removing the text ``Sec. 242.600(b)(51)'' and
adding in its place ``Sec. 242.600(b)(58)'';
0
f. In paragraph (a)(6) removing the text ``Sec. 242.600(b)(59)'' and
adding in its place ``Sec. 242.600(b)(66)'';
0
g In paragraph (a)(7) removing the text ``Sec. 242.600(b)(68)'' and
adding in its place ``Sec. 242.600(b)(76)''; and
0
h. In paragraph (a)(9) removing the text ``Sec. 242.600(b)(82)'' and
adding in its place ``Sec. 242.600(b)(93)''.
0
i. Amending paragraph (b)(1)(ii) by removing the text ``by a plan
processor'';
0
j. Amending paragraph (b)(3) by removing the text ``notify the single
plan processor responsible for consolidation of information for the
covered security pursuant to Sec. 242.603(b). The single plan
processor must then disseminate this information'' and adding in its
place ``make such information available as provided in Sec.
242.603(b)''.
Sec. 242.204 [Amended].
0
7. In Sec. 242.204, paragraph (g)(2) is amended by removing the text
``Sec. 600(b)(68) of Regulation NMS (17 CFR 242.600(b)(68))'' and
adding in its place ``Sec. 600(b)(76) of Regulation NMS (17 CFR
242.600(b)(76))''.
0
8. Amend Sec. 242.600 by:
0
a. Redesignating paragraphs (b)(72) through (87) as paragraphs (b)(83)
through (98);
0
b. Adding new paragraphs (b)(81) and (82);
0
c. Redesignating paragraphs (b)(69) through (71) as paragraphs (b)(78)
through (80);
0
d. Adding new paragraph (b)(77);
0
e. Redesignating paragraphs (b)(60) through (68) as paragraphs (b)(68)
through (76);
0
f. Adding new paragraph (b)(67);
0
g. Redesignating paragraphs (b)(26) through (59) as paragraphs (b)(33)
through (66);
0
h. Adding new paragraph (b)(32);
0
i. Redesignating paragraphs (b)(20) through (25) as paragraphs (b)(26)
through (31);
0
j. Adding new paragraph (b)(25);
0
k. Redesignating paragraphs (b)(16) through (19) as paragraphs (b)(21)
through (24);
0
l. Adding new paragraphs (b)(19) and (20);
0
m. Redesignating paragraphs (b)(14) and (15) as paragraphs (b)(17) and
(18);
0
n. Adding new paragraph (b)(16);
0
o. Redesignating paragraphs (b)(4) through (13) as paragraphs (b)(6)
through (15);
0
p. Adding new paragraph (b)(5);
0
q. Redesignating paragraphs (b)(2) and (3) as paragraphs (b)(3) through
(4);
0
r. Adding new paragraph (b)(2); and
0
s. Revising newly redesignated paragraphs (b)(50) and (69).
The additions and revisions read as follows:
Sec. 242.600 NMS security designation and definitions.
(b) * * *
(2) Administrative data means administrative, control, and other
technical messages made available by national securities exchanges and
national securities associations pursuant to the effective national
market system plan or plans required under Sec. 242.603(b) or the
technical specifications thereto as of [date of Commission approval of
this proposal].
* * * * *
(5) Auction information means all information specified by national
securities exchange rules or effective national market system plans
that is generated by a national securities exchange leading up to and
during an auction, including opening, reopening, and closing auctions,
and disseminated during the time periods and at the time intervals
provided in such rules and plans.
* * * * *
(16) Competing consolidator means a securities information
processor required to be registered pursuant to Rule 614 or a national
securities exchange or national securities association that receives
information with respect to quotations for and transactions in NMS
stocks and generates consolidated market data for dissemination to any
person.
* * * * *
(19) Consolidated market data means the following data,
consolidated across all national securities exchanges and national
securities associations:
(i) Core data;
(ii) Regulatory data;
(iii) Administrative data;
(iv) Exchange-specific program data; and
(v) Additional regulatory, administrative, or exchange-specific
program data elements defined as such pursuant to the effective
national market system plan or plans required under Sec. 242.603(b).
(20) Core data means the following information with respect to
quotations for, and transactions in, NMS stocks. For purposes of the
calculation and dissemination of core data by competing consolidators,
and the calculation of core data by self-aggregators, the best bid and
best offer, national best bid and national best offer, and depth of
book data shall include odd-lots that when aggregated are equal to or
greater than a round lot; such aggregation shall occur across multiple
prices and shall be disseminated at the least aggressive price of all
such aggregated odd-lots. For purposes of the calculation and
dissemination of core data by competing consolidators, and the
calculation of core data by self-aggregators, protected quotations
shall include odd-lots at a single price that when aggregated are equal
to or greater than 100 shares:
(i) Quotation sizes;
(ii) Aggregate quotation sizes;
(iii) Best bid and best offer;
(iv) National best bid and national best offer;
(v) Protected bid and protected offer;
(vi) Transaction reports;
(vii) Last sale data;
(viii) Odd-lot transaction data disseminated pursuant to the
effective national market system plan or plans required under Sec.
242.603(b) as of [date of Commission approval of this proposal].
(ix) Depth of book data; and
(x) Auction information.
* * * * *
(25) Depth of book data means all quotation sizes at each national
securities exchange, aggregated at each price at which there is a bid
or offer that is lower than the best bid down to the protected bid and
higher than the best offer up to the protected offer; and all quotation
sizes at each national securities exchange, aggregated at each of the
next 5 prices at which there is a bid that is lower than the protected
bid and offer that is higher than the protected offer.
* * * * *
[[Page 16869]]
(32) Exchange-specific program data means: (i) Information related
to retail liquidity programs specified by the rules of national
securities exchanges and disseminated pursuant to the effective
national market system plan or plans required under Sec. 242.603(b) as
of [date of Commission approval of this proposal]; and
(ii) Other exchange-specific information with respect to quotations
for or transactions in NMS stocks as specified by the effective
national market system plan or plans required under Sec. 242.603(b).
* * * * *
(50) National best bid and national best offer means, with respect
to quotations for an NMS stock, the best bid and best offer for such
stock that are calculated and disseminated on a current and continuing
basis by a competing consolidator or calculated by a self-aggregator
and, for NMS securities other than NMS stocks, the best bid and best
offer for such security that are calculated and disseminated on a
current and continuing basis by a plan processor pursuant to an
effective national market system plan; provided, that in the event two
or more market centers transmit to the plan processor, a competing
consolidator or self-aggregator identical bids or offers for an NMS
security, the best bid or best offer (as the case may be) shall be
determined by ranking all such identical bids or offers (as the case
may be) first by size (giving the highest ranking to the bid or offer
associated with the largest size), and then by time (giving the highest
ranking to the bid or offer received first in time).
* * * * *
(67) Primary listing exchange means, for each NMS stock, the
national securities exchange identified as the primary listing exchange
in the effective national market system plan or plans required under
Sec. 242.603(b).
* * * * *
(69) Protected bid or protected offer means a quotation in an NMS
stock that:
(i) Is displayed by an automated trading center;
(ii) Is disseminated pursuant to an effective national market
system plan; and
(iii) Is an automated quotation that is the best bid or best offer
of at least 100 shares of a national securities exchange, or the best
bid or best offer of at least 100 shares of a national securities
association.
* * * * *
(77) Regulatory data means:
(i) Information required to be collected or calculated by the
primary listing exchange for an NMS stock and provided to competing
consolidators and self-aggregators pursuant to the effective national
market system plan or plans required under Sec. 242.603(b), including,
at a minimum:
(A) Information regarding Short Sale Circuit Breakers pursuant to
Sec. 242.201;
(B) Information regarding Price Bands required pursuant to the Plan
to Address Extraordinary Market Volatility (LULD Plan);
(C) Information relating to regulatory halts or trading pauses
(news dissemination/pending, LULD, Market-Wide Circuit Breakers) and
reopenings or resumptions;
(D) The official opening and closing prices of the primary listing
exchange; and
(E) An indicator of the applicable round lot size.
(ii) Information required to be collected or calculated by the
national securities exchange or national securities association on
which an NMS stock is traded and provided to competing consolidators
and self-aggregators pursuant to the effective national market system
plan or plans required under Sec. 242.603(b), including, at a minimum:
(A) Whenever such national securities exchange or national
securities association receives a bid (offer) below (above) an NMS
stock's lower (upper) LULD price band, an appropriate regulatory data
flag identifying the bid (offer) as non-executable; and
(B) Other regulatory messages including subpenny execution and
trade-though exempt indicators.
(iii) For purposes of paragraph (i)(C) of this definition, the
primary listing exchange that has the largest proportion of companies
included in the S&P 500 Index shall monitor the S&P 500 Index
throughout the trading day, determine whether a Level 1, Level 2, or
Level 3 decline, as defined in self-regulatory organization rules
related to Market-Wide Circuit Breakers, has occurred, and immediately
inform the other primary listing exchanges of all such declines.
* * * * *
(81) Round lot means:
(i) For any NMS stock for which the prior calendar month's average
closing price on the primary listing exchange (or the IPO price if the
prior month's average closing price is not available) was $50.00 or
less per share, an order for the purchase or sale of an NMS stock of
100 shares;
(ii) For any NMS stock for which the prior calendar month's average
closing price on the primary listing exchange (or the IPO price if the
prior month's average closing price is not available) was $50.01 to
$100.00 per share, an order for the purchase or sale of an NMS stock of
20 shares;
(iii) For any NMS stock for which the prior calendar month's
average closing price on the primary listing exchange (or the IPO price
if the prior month's average closing price is not available) was
$100.01 to $500.00 per share, an order for the purchase or sale of an
NMS stock of 10 shares;
(iv) For any NMS stock for which the prior calendar month's average
closing price on the primary listing exchange (or the IPO price if the
prior month's average closing price is not available) was $500.01 to
$1,000.00 per share, an order for the purchase or sale of an NMS stock
of 2 shares; and
(v) For any NMS stock for which the prior calendar month's average
closing price on the primary listing exchange (or the IPO price if the
prior month's average closing price is not available) was $1,000.01 or
more per share, an order for the purchase or sale of an NMS stock of 1
share.
(82) Self-aggregator means a broker or dealer that receives
information with respect to quotations for and transactions in NMS
stocks, including all data necessary to generate consolidated market
data, and generates consolidated market data solely for internal use. A
self-aggregator may not make consolidated market data, or any subset of
consolidated market data, available to any other person.
* * * * *
Sec. 242.602 [Amended].
0
9. Amend Sec. 242.602 by:
0
a. In paragraph (a)(5)(i) removing the text ``Sec. 242.600(b)(77)''
and adding in its place ``Sec. 242.600(b)(88)'' and
0
b. In paragraph (a)(5)(ii) removing the text ``Sec. 242.600(b)(77)''
and adding in its place ``Sec. 242.600(b)(88)''.
0
10. Amend Sec. 242.603 by revising paragraph (b) to read as follows:
Sec. 242.603 Distribution, consolidation, and display of information
with respect to quotations for and transactions in NMS stocks.
* * * * *
(b) Dissemination of information. Every national securities
exchange on which an NMS stock is traded and national securities
association shall act jointly pursuant to one or more effective
national market system plans for the dissemination of consolidated
market data. Every national securities exchange on which an NMS stock
is traded and national securities association shall make available to
all competing
[[Page 16870]]
consolidators and self-aggregators its information with respect to
quotations for and transactions in NMS stocks, including all data
necessary to generate consolidated market data, in the same manner and
using the same methods, including all methods of access and the same
format, as such national securities exchange or national securities
association makes available any information with respect to quotations
for and transactions in NMS stocks to any person.
* * * * *
Sec. 242.611 [Amended].
0
11. In Sec. 242.611, amend paragraph (c) by removing the text ``Sec.
242.600(b)(31)'' and adding in its place ``Sec. 242.600(b)(38)''.
0
12. Add Sec. 242.614 to read as follows:
Sec. 242.614 Registration and responsibilities of competing
consolidators.
(a) Competing consolidator registration. (1) Initial Form CC. (i)
Filing and effectiveness requirement. No person, other than a national
securities exchange or a national securities association,
(A) May receive directly from a national securities exchange or
national securities association information with respect to quotations
for and transactions in NMS stocks; and
(B) Generate consolidated market data for dissemination to any
person unless the person files with the Commission an initial Form CC
and the initial Form CC has become effective pursuant to paragraph
(a)(1)(v) of this section.
(ii) Electronic filing and submission. Any reports to the
Commission required under this Rule 614 shall be filed electronically
on Form CC (17 CFR 249.1002), include all information as prescribed in
Form CC and the instructions thereto, and contain an electronic
signature as defined in Sec. 240.19b-4(j).
(iii) Commission review period. The Commission may, by order, as
provided in paragraph (a)(1)(v)(B) of this section, declare an initial
Form CC filed by a competing consolidator ineffective no later than 90
calendar days from the date of filing with the Commission.
(iv) Withdrawal of initial Form CC due to inaccurate or incomplete
disclosures. During the review by the Commission of the initial Form
CC, if any information disclosed in the initial Form CC is or becomes
inaccurate or incomplete, the competing consolidator shall promptly
withdraw the initial Form CC and may refile an initial Form CC pursuant
to paragraph (a)(1).
(v) Effectiveness; Ineffectiveness determination. (A) An initial
Form CC filed by a competing consolidator will become effective, unless
declared ineffective, no later than the expiration of the review period
provided in paragraph (a)(1)(iii) of this section and publication
pursuant to paragraph (b)(2)(i) of this section.
(B) The Commission shall, by order, declare an initial Form CC
ineffective if it finds, after notice and opportunity for hearing, that
such action is necessary or appropriate in the public interest, and is
consistent with the protection of investors. If the Commission declares
an initial Form CC ineffective, the competing consolidator shall be
prohibited from operating as a competing consolidator. An initial Form
CC declared ineffective does not prevent the competing consolidator
from subsequently filing a new Form CC.
(2) Form CC Amendments. A competing consolidator shall amend a Form
CC:
(i) Prior to the implementation of a material change to the
pricing, connectivity, or products offered (``Material Amendment'');
and
(ii) No later than 30 calendar days after the end of each calendar
year to correct information that has become inaccurate or incomplete
for any reason and to provide an Annual Report as required under Form
CC (each a ``Form CC Amendment'').
(3) Notice of cessation. A competing consolidator shall notice its
cessation of operations on Form CC at least 30 business days prior to
the date the competing consolidator will cease to operate as a
competing consolidator. The notice of cessation shall cause the Form CC
to become ineffective on the date designated by the competing
consolidator.
(4) Date of filing. For purposes of filings made pursuant to this
section:
(i) The term business day shall have the same meaning as defined in
Sec. 240.19b-4(b)(2).
(ii) If the conditions of this section and Form CC are otherwise
satisfied, all filings submitted electronically on or before 5:30 p.m.
Eastern Standard Time or Eastern Daylight Saving Time, whichever is
currently in effect, on a business day, shall be deemed filed on that
business day, and all filings submitted after 5:30 p.m. Eastern
Standard Time or Eastern Daylight Saving Time, whichever is currently
in effect, shall be deemed filed on the next business day.
(b) Public disclosures. (1) Every Form CC filed pursuant to this
section shall constitute a ``report'' within the meaning of sections
11A, 17(a), 18(a), and 32(a) of the Act (15 U.S.C. 78k-1, 78q(a),
78r(a), and 78ff(a)), and any other applicable provisions of the Act.
(2) The Commission will make public via posting on the Commission's
website, each:
(i) Effective initial Form CC, as amended;
(ii) Order of ineffective initial Form CC;
(iii) Form CC Amendment. The Commission will make public the
entirety of any Form CC Amendment no later than 30 calendar days from
the date of filing thereof with the Commission; and
(iv) Notice of cessation.
(c) Posting of hyperlink to the Commission's website. Each
competing consolidator shall make public via posting on its website a
direct URL hyperlink to the Commission's website that contains the
documents enumerated in paragraph (b)(2) of this section.
(d) Responsibilities of competing consolidators. Each competing
consolidator shall:
(1) Collect from each national securities exchange and national
securities association, either directly or indirectly, the information
with respect to quotations for and transactions in NMS stocks as
provided in Rule 603(b).
(2) Calculate and generate consolidated market data as defined in
Rule 600(b)(19) from the information collected pursuant to paragraph
(d)(1) of this section.
(3) Make consolidated market data, as defined in Rule 600(b)(19),
as timestamped as required by paragraph (d)(4) of this section and
including the national securities exchange and national securities
association data generation timestamp required to be provided by the
national securities exchange and national securities association
participants by paragraph (e)(1)(ii) of this section, available to
subscribers on a consolidated basis on terms that are not unreasonably
discriminatory.
(4) Timestamp the information collected pursuant to paragraph
(d)(1) of this section (i) upon receipt from each national securities
exchange and national securities association; (ii) upon receipt of such
information at its aggregation mechanism; and (iii) upon dissemination
of consolidated market data to subscribers.
(5) Within fifteen [15] calendar days after the end of each month,
publish prominently on its website monthly performance metrics, as
defined by the effective national market system plan(s) for NMS stocks,
that shall include at least the following. All information must be
publicly posted in
[[Page 16871]]
downloadable files and must remain free and accessible (without any
encumbrances or restrictions) by the general public on the website for
a period of not less than three years from the initial date of posting.
(i) Capacity statistics;
(ii) Message rate and total statistics;
(iii) System availability;
(iv) Network delay statistics; and
(v) Latency statistics for the following, with distribution
statistics up to the 99.99th percentile:
(A) When a national securities exchange or national securities
association sends an inbound message to a competing consolidator
network and when the competing consolidator network receives the
inbound message;
(B) When the competing consolidator network receives the inbound
message and when the competing consolidator network sends the
corresponding consolidated message to a subscriber; and
(C) When a national securities exchange or national securities
association sends an inbound message to a competing consolidator
network and when the competing consolidator network sends the
corresponding consolidated message to a subscriber.
(6) Within fifteen [15] calendar days after the end of each month,
publish prominently on its website the following information. All
information must be publicly posted and must remain free and accessible
(without any encumbrances or restrictions) by the general public on the
website for a period of not less than three years from the initial date
of posting.
(i) Data quality issues;
(ii) System issues;
(iii) Any clock synchronization protocol utilized;
(iv) For the clocks used to generate the timestamps described in
paragraph (d)(4) of this section, the clock drift averages and peaks,
and the number of instances of clock drift greater than 100
microseconds; and
(v) Vendor alerts.
(7) Keep and preserve at least one copy of all documents, including
all correspondence, memoranda, papers, books, notices, accounts and
such other records as shall be made or received by it in the course of
its business as such and in the conduct of its business. Competing
consolidators shall keep all such documents for a period of no less
than five years, the first two years in an easily accessible place;
(8) Upon request of any representative of the Commission, promptly
furnish to the possession of such representative copies of any
documents required to be kept and preserved by it.
(e) Amendment of the effective national market system plan(s) for
NMS stocks. (1) The participants to the effective national market
system plan(s) for NMS stocks shall file with the Commission, pursuant
to Rule 608, an amendment that includes the following provisions within
60 calendar days from the effective date of Rule 614:
(i) Conforming the effective national market system plan(s) for NMS
stocks to reflect provision of information with respect to quotations
for and transactions in NMS stocks that is necessary to generate
consolidated market data by the national securities exchange and
national securities association participants to competing consolidators
and self-aggregators;
(ii) The application of timestamps by the national securities
exchange and national securities association participants on all
consolidated market data, including the time that consolidated market
data was generated as applicable by the national securities exchange or
national securities association and the time the national securities
exchange or national securities association made the consolidated
market data available to competing consolidators and self-aggregators;
(iii) Assessments of competing consolidator performance, including
speed, reliability, and cost of data provision and the provision of an
annual report of such assessment to the Commission;
(iv) A list that identifies the primary listing exchange for each
NMS stock.
0
13. Amend Sec. 242.1000 by:
0
a. In the definition of ``Critical SCI systems,'' removing the text
``consolidated market data'' in paragraph (1)(v) and adding in its
place ``market data by a plan processor'';
0
b. Adding in alphabetical order the definition of ``Competing
consolidator'';
0
c. In the definition of ``Plan processor'' removing the text ``Sec.
242.600(b)(59)'' and adding in its place ``Sec. 242.600(b)(66)''.
0
d. In the definition``SCI entity'' removing the period and adding at
the end of the definition ``, or competing consolidator.''
The addition to read as follows:
Sec. 242.1000 Definitions.
* * * * *
Competing consolidator has the meaning set forth in Sec.
242.600(b)(16).
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
14. The general authority citation for part 249 continues to read in
part as follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001,
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *
0
15. Add Sec. 249.1002 to Subpart K to read as follows:
Sec. 249.1002 Form CC, for application for registration as a
competing consolidator or to amend such an application or registration.
This form shall be used for application for registration as a
competing consolidator, pursuant to section 11A of the Securities
Exchange Act of 1934 (15 U.S.C. 78k-1) and Sec. 242.614 of this
chapter, or to amend such an application or registration.
Note: The text of Form CC does not, and the amendments will
not, appear in the Code of Federal Regulations.
BILLING CODE 8011-01-P
[[Page 16872]]
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[[Page 16873]]
[GRAPHIC] [TIFF OMITTED] TP24MR20.001
[[Page 16874]]
[GRAPHIC] [TIFF OMITTED] TP24MR20.002
[[Page 16875]]
[GRAPHIC] [TIFF OMITTED] TP24MR20.003
[[Page 16876]]
[GRAPHIC] [TIFF OMITTED] TP24MR20.004
[[Page 16877]]
[GRAPHIC] [TIFF OMITTED] TP24MR20.005
[[Page 16878]]
[GRAPHIC] [TIFF OMITTED] TP24MR20.006
BILLING CODE 8011-01-C
Form CC General Instructions
A. Use of the Form
Form CC is the form a competing consolidator must file to notify
the Securities and Exchange Commission (``SEC'' or ``Commission'') of
its activities pursuant to Rule 614 of Regulation NMS, Sec. 242.614 et
seq. Filings submitted pursuant to Rule 614 shall be filed in an
electronic format through an electronic form filing system (``EFFS''),
a secure website operated by the Commission. Documents attached as
exhibits filed through the EFFS system must be in a text-searchable
format without the use of optical character recognition. If, however, a
portion of a Form CC submission (e.g., an image or diagram) cannot be
made available in a text-searchable format, such portion may be
submitted in a non-text searchable format.
B. Need for Careful Preparation of the Completed Form, Including
Exhibits
A competing consolidator must provide all of the information
required by Form CC, including the exhibits, and must provide
disclosure information that is accurate, current, and complete. The
information in the exhibits must be provided in a clear and
comprehensible manner. A filing that is incomplete or similarly
deficient may be returned to the competing consolidator. Any filing so
returned shall for all purposes be deemed not to have been filed with
the Commission. See also Rule 0-3 under the Securities Exchange Act of
1934 (17 CFR 240.0-3).
C. When To Use the FORM CC
Form CC is comprised of 4 types of submissions to the Commission
required pursuant to Rule 614 of Regulation NMS. In filling out the
Form CC, a competing consolidator shall select the type of filing and
provide all information required by Rule 614 of Regulation NMS. The
types of submissions are:
(1) Rule 614(a)(1) Initial Form CC: Prior to commencing operations,
a competing consolidator shall file an initial Form CC and the initial
Form CC must become effective.
(2) Rule 614(a)(2)(i) Material Amendment: The competing
consolidator shall file an amendment on Form CC prior to implementing a
material change to the pricing, connectivity, or products offered of
the competing consolidator.
(3) Rule 614(a)(2)(ii) Annual Report: The competing consolidator
shall file an Annual Report on Form CC correcting any information
contained in the initial Form CC or in any previously filed amendment
that has been rendered inaccurate or incomplete for any reason, and
that has not previously been reported to the SEC, no later than 30
calendar days after the end of each calendar year in which the
competing consolidator has operated. Competing consolidators filing the
Annual Report must file a complete form, including all pages and
answers to all items, together with all exhibits. The competing
consolidator must indicate which items have been amended since the last
Annual Report.
(4) Rule 614(a)(3) Notice of Cessation: The competing consolidator
shall file a notice of cessation of operations at least 30 business
days prior to the date upon ceasing to operate as a competing
consolidator.
D. Documents Comprising the Completed Form
The completed form filed with the Commission shall consist of Form
CC, responses to all applicable items, and any exhibits required in
connection with the filing. Each filing shall be marked on Form CC with
the initials of the competing consolidator, the four-digit year, and
the number of the filing for the year (e.g., FormCC-acronym-YYYY-XXX).
E. Contact Information; Signature; and Filing of Completed Form
Each time a competing consolidator submits a filing to the
Commission on Form CC, the competing consolidator must provide the
contact information required by Section VI of Form CC. The contact
employee must be authorized to receive all contact information,
communications and mailings and must be responsible for disseminating
that information within the competing consolidator's organization.
In order to file Form CC through the EFFS, a competing consolidator
must request access to the Commission's External Application Server.
Initial requests will be received by contacting the Division of Trading
& Markets at (202) 551-5777. An email will be sent to the requestor
that will provide a link to a secure website where basic profile
information will be requested.
A duly authorized individual of the competing consolidator shall
electronically sign the completed Form CC as indicated in Section VII
of the form.
F. Paperwork Reduction Act Disclosure
Form CC requires a competing consolidator subject to Rule 614 of
Regulation NMS to provide the Commission with certain information
regarding the operation of the competing consolidator, material and
other changes to the operation of the competing consolidator, and
notice upon ceasing operation of the competing consolidator.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid control number. Sections 3(b), 11A(a), 11A(c), 15(c),
17(a), 23(a) and 36(a) authorize the Commission to collect information
on this Form CC from competing consolidators that are subject to Rule
614. See 15 U.S.C. 78c(b), 78k-1(a), 78k-1(c), 78o(c), 78q(a), 78w(a)
and 78mm(a).
It is estimated that a competing consolidator will spend
approximately 200.3 hours completing the initial operation report on
Form CC, approximately 6.15 hours preparing each amendment to Form CC,
and approximately two (2) hours preparing a cessation of operations
report on Form CC. Any member of the public may direct to the
Commission any comments concerning the accuracy of the burden estimate
on the facing page of Form CC and any suggestions for reducing this
burden.
Form CC is designed to enable the Commission to determine whether a
competing consolidator subject to Rule 614 of Regulation NMS is in
compliance with Rule 614 and other federal securities laws. It is
mandatory that a competing consolidator subject to Rule 614 file an
initial Form CC, file an amendment to Form CC prior to making a
material change, file Annual Reports
[[Page 16879]]
to Form CC to reflect changes not previously reported, and file notice
on Form CC upon ceasing operation of the competing consolidator.
All reports provided to the Commission on Form CC are subject to
the provisions of the Freedom of Information Act, 5 U.S.C. 522
(``FOIA'') and the Commission's rules thereunder (17 CFR
200.80(b)(4)(iii)).
This collection of information has been reviewed by the Office of
Management and Budget (``OMB'') in accordance with the clearance
requirements of 44 U.S.C. 3507. The applicable Privacy Act system of
records is SEC-2 and the routine uses of the records are set forth at
40 FR 39255 (August 27, 1975) and 41 FR 5318 (February 5, 1976).
G. Definitions
Unless the context requires otherwise, all terms used in this form
have the same meaning as in the Securities Exchange Act of 1934, as
amended, and in the rules and regulations of the Commission thereunder.
0
16. Revise subpart T, consisting of Sec. 249.1900 to read as follows:
Subpart T--Form SCI, for filing notices and reports as required by
Regulation SCI.
Sec. 249.1900. Form SCI, for filing notices and reports as required
by Regulation SCI.
Form SCI shall be used to file notices and reports as required by
Regulation SCI (Sec. Sec. 242.1000 through 242.1007).
Note: The text of Form SCI does not, and the amendments will
not, appear in the Code of Federal Regulations.
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General Instructions for Form SCI
A. Use of the Form
Except with respect to notifications to the Commission made
pursuant to Rule 1002(b)(1) or updates to the Commission made pursuant
to Rule 1002(b)(3), any notification, review, description, analysis, or
report required to be submitted pursuant to Regulation SCI under the
Securities Exchange Act of 1934 (``Act'') shall be filed in an
electronic format through an electronic form filing system (``EFFS''),
a secure website operated by the Securities and Exchange Commission
(``Commission''). Documents attached as exhibits filed through the EFFS
system must be in a text-searchable format without the use of optical
character recognition. If,
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however, a portion of a Form SCI submission (e.g., an image or diagram)
cannot be made available in a text-searchable format, such portion may
be submitted in a non-text searchable format.
B. Need for Careful Preparation of the Completed Form, Including
Exhibits
This form, including the exhibits, is intended to elicit
information necessary for Commission staff to work with SCI self-
regulatory organizations, SCI alternative trading systems, plan
processors, exempt clearing agencies subject to ARP, and competing
consolidators (collectively, ``SCI entities'') to ensure the capacity,
integrity, resiliency, availability, security, and compliance of their
automated systems. An SCI entity must provide all the information
required by the form, including the exhibits, and must present the
information in a clear and comprehensible manner. A filing that is
incomplete or similarly deficient may be returned to the SCI entity.
Any filing so returned shall for all purposes be deemed not to have
been filed with the Commission. See also Rule 0-3 under the Act (17 CFR
240.0-3).
C. When to Use the Form
Form SCI is comprised of six types of required submissions to the
Commission pursuant to Rules 1002 and 1003. In addition, Form SCI
permits SCI entities to submit to the Commission two additional types
of submissions pursuant to Rules 1002(b)(1) and 1002(b)(3); however,
SCI entities are not required to use Form SCI for these two types of
submissions to the Commission. In filling out Form SCI, an SCI entity
shall select the type of filing and provide all information required by
Regulation SCI specific to that type of filing.
The first two types of required submissions relate to Commission
notification of certain SCI events:
(1) ``Rule 1002(b)(2) Notification of SCI Event'' submissions for
notifications regarding systems disruptions, systems compliance issues,
or systems intrusions (collectively, ``SCI events''), other than any
systems disruption or systems intrusion that has had, or the SCI entity
reasonably estimates would have, no or a de minimis impact on the SCI
entity's operations or on market participants; and
(2) ``Rule 1002(b)(4) Final or Interim Report of SCI Event''
submissions, of which there are two kinds (a final report under Rule
1002(b)(4)(i)(A) or Rule 1002(b)(4)(i)(B)(2); or an interim status
report under Rule 1002(b)(4)(i)(B)(1)).
The other four types of required submissions are periodic reports,
and include:
(1) ``Rule 1002(b)(5)(ii)'' submissions for quarterly reports of
systems disruptions and systems intrusions which have had, or the SCI
entity reasonably estimates would have, no or a de minimis impact on
the SCI entity's operations or on market participants (``de minimis SCI
events'');
(2) ``Rule 1003(a)(1)'' submissions for quarterly reports of
material systems changes;
(3) ``Rule 1003(a)(2)'' submissions for supplemental reports of
material systems changes; and
(4) ``Rule 1003(b)(3)'' submissions for reports of SCI reviews.
Required Submissions for SCI Events
For 1002(b)(2) submissions, an SCI entity must notify the
Commission using Form SCI by selecting the appropriate box in Section I
and filling out all information required by the form, including Exhibit
1. 1002(b)(2) submissions must be submitted within 24 hours of any
responsible SCI personnel having a reasonable basis to conclude that an
SCI event has occurred.
For 1002(b)(4) submissions, if an SCI event is resolved and the SCI
entity's investigation of the SCI event is closed within 30 calendar
days of the occurrence of the SCI event, an SCI entity must file a
final report under Rule 1002(b)(4)(i)(A) within five business days
after the resolution of the SCI event and closure of the investigation
regarding the SCI event. However, if an SCI event is not resolved or
the SCI entity's investigation of the SCI event is not closed within 30
calendar days of the occurrence of the SCI event, an SCI entity must
file an interim status report under Rule 1002(b)(4)(i)(B)(1) within 30
calendar days after the occurrence of the SCI event. For SCI events in
which an interim status report is required to be filed, an SCI entity
must file a final report under Rule 1002(b)(4)(i)(B)(2) within five
business days after the resolution of the SCI event and closure of the
investigation regarding the SCI event. For 1002(b)(4) submissions, an
SCI entity must notify the Commission using Form SCI by selecting the
appropriate box in Section I and filling out all information required
by the form, including Exhibit 2.
Required Submissions for Periodic Reporting
For 1002(b)(5)(ii) submissions, an SCI entity must submit quarterly
reports of systems disruptions and systems intrusions which have had,
or the SCI entity reasonably estimates would have, no or a de minimis
impact on the SCI entity's operations or on market participants. The
SCI entity must select the appropriate box in Section II and fill out
all information required by the form, including Exhibit 3.
For 1003(a)(1) submissions, an SCI entity must submit its quarterly
report of material systems changes to the Commission using Form SCI.
The SCI entity must select the appropriate box in Section II and fill
out all information required by the form, including Exhibit 4.
Filings made pursuant to Rule 1002(b)(5)(ii) and Rule 1003(a)(1)
must be submitted to the Commission within 30 calendar days after the
end of each calendar quarter (i.e., March 31st, June 30th, September
30th and December 31st) of each year.
For 1003(a)(2) submissions, an SCI entity must submit a
supplemental report notifying the Commission of a material error in or
material omission from a report previously submitted under Rule
1003(a). The SCI entity must select the appropriate box in Section II
and fill out all information required by the form, including Exhibit 4.
For 1003(b)(3) submissions, an SCI entity must submit its report of
its SCI review, together with any response by senior management, to the
Commission using Form SCI. A 1003(b)(3) submission is required within
60 calendar days after the report of the SCI review has been submitted
to senior management of the SCI entity. The SCI entity must select the
appropriate box in Section II and fill out all information required by
the form, including Exhibit 5.
Optional Submissions
An SCI entity may, but is not required to, use Form SCI to submit a
notification pursuant to Rule 1002(b)(1). If the SCI entity uses Form
SCI to submit a notification pursuant to Rule 1002(b)(1), it must
select the appropriate box in Section I and provide a short description
of the SCI event. Documents may also be attached as Exhibit 6 if the
SCI entity chooses to do so. An SCI entity may, but is not required to,
use Form SCI to submit an update pursuant to Rule 1002(b)(3). Rule
1002(b)(3) requires an SCI entity to, until such time as the SCI event
is resolved and the SCI entity's investigation of the SCI event is
closed, provide updates pertaining to such SCI event to the Commission
on a regular basis, or at such frequency as reasonably requested by a
representative of the Commission, to correct any materially incorrect
information previously provided, or when new
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material information is discovered, including but not limited to, any
of the information listed in Rule 1002(b)(2)(ii). If the SCI entity
uses Form SCI to submit an update pursuant to Rule 1002(b)(3), it must
select the appropriate box in Section I and provide a short description
of the SCI event. Documents may also be attached as Exhibit 6 if the
SCI entity chooses to do so.
D. Documents Comprising the Completed Form
The completed form filed with the Commission shall consist of Form
SCI, responses to all applicable items, and any exhibits required in
connection with the filing. Each filing shall be marked on Form SCI
with the initials of the SCI entity, the four-digit year, and the
number of the filing for the year (e.g., SCI Name-YYYY-XXX).
E. Contact Information; Signature; and Filing of the Completed Form
Each time an SCI entity submits a filing to the Commission on Form
SCI, the SCI entity must provide the contact information required by
Section III of Form SCI. Space for additional contact information, if
appropriate, is also provided.
All notifications and reports required to be submitted through Form
SCI shall be filed through the EFFS. In order to file Form SCI through
the EFFS, SCI entities must request access to the Commission's External
Application Server by completing a request for an external account user
ID and password. Initial requests will be received by contacting (202)
551-5777. An email will be sent to the requestor that will provide a
link to a secure website where basic profile information will be
requested. A duly authorized individual of the SCI entity shall
electronically sign the completed Form SCI as indicated in Section IV
of the form. In addition, a duly authorized individual of the SCI
entity shall manually sign one copy of the completed Form SCI, and the
manually signed signature page shall be preserved pursuant to the
requirements of Rule 1005.
F. Withdrawals of Commission Notifications and Periodic Reports
If an SCI entity determines to withdraw a Form SCI, it must
complete Page 1 of the Form SCI and indicate by selecting the
appropriate check box to withdraw the submission.
G. Paperwork Reduction Act Disclosure
This collection of information will be reviewed by the Office of
Management and Budget in accordance with the clearance requirements of
44 U.S.C. 3507. An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid control number. The Commission estimates
that the average burden to respond to Form SCI will be between one and
125 hours, depending upon the purpose for which the form is being
filed. Any member of the public may direct to the Commission any
comments concerning the accuracy of this burden estimate and any
suggestions for reducing this burden.
Except with respect to notifications to the Commission made
pursuant to Rule 1002(b)(1) or updates to the Commission made pursuant
to Rule 1002(b)(3), it is mandatory that an SCI entity file all
notifications, reviews, descriptions, analyses, and reports required by
Regulation SCI using Form SCI. The Commission will keep the information
collected pursuant to Form SCI confidential to the extent permitted by
law. Subject to the provisions of the Freedom of Information Act, 5
U.S.C. 522 (``FOIA''), and the Commission's rules thereunder (17 CFR
200.80(b)(4)(iii)), the Commission does not generally publish or make
available information contained in any reports, summaries, analyses,
letters, or memoranda arising out of, in anticipation of, or in
connection with an examination or inspection of the books and records
of any person or any other investigation.
H. Exhibits
List of exhibits to be filed, as applicable:
Exhibit 1: Rule 1002(b)(2)--Notification of SCI Event. Within 24
hours of any responsible SCI personnel having a reasonable basis to
conclude that the SCI event has occurred, the SCI entity shall submit a
written notification pertaining to such SCI event to the Commission,
which shall be made on a good faith, best efforts basis and include:
(a) A description of the SCI event, including the system(s) affected;
and (b) to the extent available as of the time of the notification: The
SCI entity's current assessment of the types and number of market
participants potentially affected by the SCI event; the potential
impact of the SCI event on the market; a description of the steps the
SCI entity has taken, is taking, or plans to take, with respect to the
SCI event; the time the SCI event was resolved or timeframe within
which the SCI event is expected to be resolved; and any other pertinent
information known by the SCI entity about the SCI event.
Exhibit 2: Rule 1002(b)(4)--Final or Interim Report of SCI Event.
When submitting a final report pursuant to either Rule 1002(b)(4)(i)(A)
or Rule 1002(b)(4)(i)(B)(2), the SCI entity shall include: (a) A
detailed description of: The SCI entity's assessment of the types and
number of market participants affected by the SCI event; the SCI
entity's assessment of the impact of the SCI event on the market; the
steps the SCI entity has taken, is taking, or plans to take, with
respect to the SCI event; the time the SCI event was resolved; the SCI
entity's rule(s) and/or governing document(s), as applicable, that
relate to the SCI event; and any other pertinent information known by
the SCI entity about the SCI event; (b) a copy of any information
disseminated pursuant to Rule 1002(c) by the SCI entity to date
regarding the SCI event to any of its members or participants; and (c)
an analysis of parties that may have experienced a loss, whether
monetary or otherwise, due to the SCI event, the number of such
parties, and an estimate of the aggregate amount of such loss. When
submitting an interim report pursuant to Rule 1002(b)(4)(i)(B)(1), the
SCI entity shall include such information to the extent known at the
time.
Exhibit 3: Rule 1002(b)(5)(ii)--Quarterly Report of De Minimis SCI
Events. The SCI entity shall submit a report, within 30 calendar days
after the end of each calendar quarter, containing a summary
description of systems disruptions and systems intrusions that have
had, or the SCI entity reasonably estimates would have, no or a de
minimis impact on the SCI entity's operations or on market
participants, including the SCI systems and, for systems intrusions,
indirect SCI systems, affected by such SCI events during the applicable
calendar quarter.
Exhibit 4: Rule 1003(a)--Quarterly Report of Systems Changes. When
submitting a report pursuant to Rule 1003(a)(1), the SCI entity shall
provide a report, within 30 calendar days after the end of each
calendar quarter, describing completed, ongoing, and planned material
changes to its SCI systems and the security of indirect SCI systems,
during the prior, current, and subsequent calendar quarters, including
the dates or expected dates of commencement and completion. An SCI
entity shall establish reasonable written criteria for identifying a
change to its SCI systems and the security of indirect SCI systems as
material and report such changes in accordance with such criteria. When
submitting a report pursuant to Rule 1003(a)(2), the SCI entity shall
provide a supplemental report of a material error in or material
omission from a report previously
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submitted under Rule 1003(a); provided, however, that a supplemental
report is not required if information regarding a material systems
change is or will be provided as part of a notification made pursuant
to Rule 1002(b).
Exhibit 5: Rule 1003(b)(3)--Report of SCI Review. The SCI entity
shall provide a report of the SCI review, together with any response by
senior management, within 60 calendar days after its submission to
senior management of the SCI entity.
Exhibit 6: Optional Attachments. This exhibit may be used in order
to attach other documents that the SCI entity may wish to submit as
part of a Rule 1002(b)(1) initial notification submission or Rule
1002(b)(3) update submission.
I. Explanation of Terms
Critical SCI systems means any SCI systems of, or operated by or on
behalf of, an SCI entity that: (a) Directly support functionality
relating to: (1) Clearance and settlement systems of clearing agencies;
(2) openings, reopenings, and closings on the primary listing market;
(3) trading halts; (4) initial public offerings; (5) the provision of
market data by a plan processor; or (6) exclusively-listed securities;
or (b) provide functionality to the securities markets for which the
availability of alternatives is significantly limited or nonexistent
and without which there would be a material impact on fair and orderly
markets.
Indirect SCI systems means any systems of, or operated by or on
behalf of, an SCI entity that, if breached, would be reasonably likely
to pose a security threat to SCI systems.
Major SCI event means an SCI event that has had, or the SCI entity
reasonably estimates would have: (a) Any impact on a critical SCI
system; or (b) a significant impact on the SCI entity's operations or
on market participants.
Responsible SCI personnel means, for a particular SCI system or
indirect SCI system impacted by an SCI event, such senior manager(s) of
the SCI entity having responsibility for such system, and their
designee(s).
SCI entity means an SCI self-regulatory organization, SCI
alternative trading system, plan processor, or exempt clearing agency
subject to ARP, or competing consolidator.
SCI event means an event at an SCI entity that constitutes: (a) A
systems disruption; (b) a systems compliance issue; or (c) a systems
intrusion.
SCI review means a review, following established procedures and
standards, that is performed by objective personnel having appropriate
experience to conduct reviews of SCI systems and indirect SCI systems,
and which review contains: (a) A risk assessment with respect to such
systems of an SCI entity; and (b) an assessment of internal control
design and effectiveness of its SCI systems and indirect SCI systems to
include logical and physical security controls, development processes,
and information technology governance, consistent with industry
standards.
SCI systems means all computer, network, electronic, technical,
automated, or similar systems of, or operated by or on behalf of, an
SCI entity that, with respect to securities, directly support trading,
clearance and settlement, order routing, market data, market
regulation, or market surveillance.
Systems Compliance Issue means an event at an SCI entity that has
caused any SCI system of such entity to operate in a manner that does
not comply with the Act and the rules and regulations thereunder or the
entity's rules or governing documents, as applicable.
Systems Disruption means an event in an SCI entity's SCI systems
that disrupts, or significantly degrades, the normal operation of an
SCI system.
Systems Intrusion means any unauthorized entry into the SCI systems
or indirect SCI systems of an SCI entity.
By the Commission.
Dated: February 14, 2020.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03760 Filed 3-23-20; 8:45 am]
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