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Proposed Rule

Market Data Infrastructure

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Start Preamble Start Printed Page 16726

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

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

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.

Start Further Info

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.

End Further Info End Preamble Start Supplemental Information

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 SizeStart Printed 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]

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 Start Printed Page 16728things, 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.

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 Start Printed Page 16729proprietary 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.

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.

As noted above, Section 11A of the Exchange Act specifically highlights the importance of making information with respect to quotations for and transactions in securities available to brokers, dealers, and investors in a prompt, accurate, reliable, and fair manner and directs the Commission to act in accordance with this finding. Accordingly, the Commission proposes to amend Regulation NMS to better achieve the goal of assuring “the availability to brokers, dealers and investors of information with respect to quotations for and transactions in securities” [24] that is prompt, accurate, reliable, and fair.[25] The Commission preliminarily believes that the proposals described herein would promote fair and efficient markets and would facilitate the best execution of investor orders, and reduce information asymmetries between market participants who currently rely on market data provided through the exclusive SIPs and those who purchase the proprietary market data products offered by the national securities exchanges.[26]

The proposed amendments include two key parts, and the Commission preliminarily believes that the proposals are complementary, but can be independently justified. First, the amendments would update the content of the information with respect to quotations for and transactions in NMS stocks that must be made available under Regulation NMS. In particular, the Commission proposes to expand the NMS information that is required to be collected, consolidated, and Start Printed Page 16730disseminated under Regulation NMS to include: (1) Information about orders in sizes smaller than the current round lot size for certain higher priced stocks; [27] (2) information about certain orders that are outside of the best bid and best offer (i.e., certain depth of book data); and (3) information about orders that are participating in opening, closing, and other auctions. The Commission preliminarily believes that enhancing the content of NMS information in this manner should help ensure that all market participants have ready access to that market information in order to facilitate participation in today's markets.

Second, the amendments introduce a decentralized consolidation model whereby competing consolidators would assume responsibility for the collection, consolidation, and dissemination functions currently performed by the exclusive SIPs.[28] To facilitate this decentralized consolidation model, the Commission proposes that each SRO would be required to make all of its market data that is necessary to generate consolidated market data (as proposed to be defined) directly available to two new categories of entities: (1) Competing consolidators and (2) self-aggregators. Competing consolidators would be either SROs or SIPs registered with the Commission pursuant to proposed Rule 614, and would be responsible for collecting, consolidating, and disseminating consolidated market data to the public. Self-aggregators would be brokers or dealers that elect to collect and generate consolidated market data for their own internal use.

Non-SRO competing consolidators would be required to register with the Commission.[29] All competing consolidators, SRO and non-SRO, would be subject to appropriate standards with respect to the promptness, accuracy, reliability, and fairness of their consolidated market data distribution. While self-aggregators would not be subject to a separate registration requirement, as registered broker-dealers, they would be subject to the full broker-dealer regulatory regime.[30] To support this proposed decentralized consolidation model, each SRO would be required to make all of its own data that is necessary to generate consolidated market data available to competing consolidators and self-aggregators directly from its data center, and in the same manner and using the same methods, including all methods of access and the same format, as it makes its proprietary market data products available to any market participant.

Under the proposed structure, the effective national market system plan(s) would continue to serve an important role in the national market system by, among other things, governing the SROs' provision of the data necessary to generate consolidated market data, including setting fees for the provision of such SRO data to competing consolidators and self-aggregators.[31] The Commission preliminarily believes that, by introducing competition and market forces into the collection, consolidation, and dissemination process, the decentralized consolidation model would help ensure that consolidated market data is delivered to market participants in a more timely, efficient, and cost-effective manner than the current centralized consolidation model.[32]

II. Current Market Data Infrastructure Under Regulation NMS and the Equity Data Plans

A. Consolidated Market Data and Proprietary Data

Today, in accordance with the centralized consolidation model, the SROs act jointly pursuant to the three Equity Data Plans to collect, consolidate, and publicly disseminate real-time, NMS information.[33] For each NMS stock, the SROs are required, pursuant to Regulation NMS and the Equity Data Plans, to provide certain quotation [34] and transaction [35] data to the designated exclusive SIP for each Equity Data Plan.[36] Each exclusive SIP collects, consolidates, and disseminates NMS information to the public on the consolidated tape, described below. The NMS information that is consolidated and made available under the Equity Data Plans generally includes: “(1) The price, size, and exchange of the last sale; (2) each exchange's current highest bid and lowest offer, and the shares available at those prices; and (3) the national best bid and offer (i.e., the highest bid and lowest offer currently available on any exchange).” [37] In general, these data elements form what historically has commonly been referred to as “core data.”

In addition to disseminating core data, the exclusive SIPs collect, calculate, and disseminate certain regulatory data, including information required by the NMS Plan to Address Extraordinary Market Volatility (“LULD Plan”),[38] information relating to regulatory halts and market-wide circuit breakers (“MWCBs”),[39] and information regarding short sale circuit breakers pursuant to Rule 201.[40] The exclusive SIPs also collect and disseminate other NMS stock data and disseminate certain administrative messages.[41] For purposes Start Printed Page 16731of this release, these existing market data elements, together with the historical “core data” described above, are referred to as “SIP data.”

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

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

With this centralized consolidation model, each exchange and FINRA must first transmit its quotation and transaction information [46] from its own data center to the appropriate exclusive SIP's data center for consolidation, at which point SIP data is then further transmitted to market data end-users, which are often located in other data centers. The SROs today typically transmit their market data through fiber optic cables to the exclusive SIPs and, in the case of the CTA/CQ SIP, through infrastructure owned and mandated by the NYSE.[47]

In addition to the provision of SIP data pursuant to the Equity Data Plans, the national securities exchanges separately sell their individual proprietary market data products, which include the SIP data elements as well as a variety of additional data elements.[48] As noted above, the proprietary DOB products are generally characterized as fast, low-latency products designed for automated trading systems that include additional content.[49] In addition to SIP data, proprietary DOB products typically include odd-lot quotations; orders at prices above and below the best prices (i.e., depth of book data); and information about orders participating in auctions, including auction order imbalances.[50]

In addition to proprietary DOB products, the exchanges offer a variety of connectivity options, such as 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 Start Printed Page 16732and to competitively participate in the markets.[54]

B. NMS Regulatory Framework

The Commission exercised its authority under Section 11A of the Exchange Act to facilitate the collection, consolidation, and dissemination of NMS information primarily by adopting five rules under Regulation NMS.[55]

Rule 601 of Regulation NMS governs the dissemination of transaction reports [56] and last sale data [57] with respect to transactions in NMS stocks. In particular, Rule 601 requires each national securities exchange and association to file a transaction reporting plan with the Commission that, among other things, must specify the manner of collecting, processing, sequencing, making available, and disseminating transaction reports and last sale data.[58]

Rule 602 of Regulation NMS governs the dissemination of quotations in NMS securities. Specifically, under Rule 602 each national securities exchange and association is required to collect, process, and make available certain quotation data to vendors,[59] including the best bid, best offer,[60] quotation sizes,[61] and aggregate quotation sizes.[62]

Rule 603 of Regulation NMS governs the distribution, consolidation, and display of information with respect to quotations for and transactions in NMS stocks. Specifically, Rule 603(a)(1) requires any exclusive processor,[63] or any broker or dealer with respect to information for which it is the exclusive source, that distributes information with respect to quotations for or transactions in an NMS stock to a securities information processor [64] to do so on terms that are fair and reasonable. Rule 603(a)(2) requires any national securities exchange, national securities association, broker, or dealer that distributes information with respect to quotations for or transactions in an NMS stock to a securities information processor, broker, dealer, or other persons to do so on terms that are not unreasonably discriminatory.[65]

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

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

C. Other Regulatory Data

As noted above, certain regulatory data is required—pursuant to Commission and exchange rules and NMS plans—to be generated by primary listing exchanges and the exclusive SIPs and included in the current SIP data. The availability of this data is critical to 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]

Start Printed 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.

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]

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.

The primary listing exchanges and the exclusive SIPs work together to implement the MWCB rules. The CTA/CQ SIP monitors the S&P 500 Index throughout the trading day and would send a message to the primary listing exchanges and the Nasdaq UTP SIP in the event a Level 1, Level 2, or Level 3 circuit breaker was triggered. Upon receipt of such a message, the applicable primary listing exchange would impose a regulatory halt by sending the appropriate message to the applicable exclusive SIP, which would then disseminate the regulatory halt message to market participants. Trade resumption messages would be generated at the appropriate time by the primary listing exchange and similarly disseminated to market participants through the applicable exclusive SIP.

4. Odd-Lot Transaction Reports and Aggregated Odd-Lot Orders

As discussed further below, while Regulation NMS only requires NMS stock quotation and transaction data in round lots to be reported to the exclusive SIPs, SRO rules and the Equity Data Plans include some odd-lot information in the SIP data.[84] Pursuant to exchange rules, odd-lot quotations that, when aggregated, equal or exceed a round lot are reported to the exclusive SIPs as round lots.[85] Moreover, the Equity Data Plans were amended in 2013 to include odd-lot transaction reports in the SIP data.[86]

III. Proposed Enhancements to NMS Information

A. Introduction

The Commission is proposing to expand the content of the NMS information that would be required to be collected, consolidated, and disseminated under the rules of the national market system to better meet the needs of today's investors and other market participants. Specifically, the Commission proposes to amend Regulation NMS by introducing, in Rule 600, new defined terms for “consolidated market data,” “core data,” “regulatory data,” “administrative data,” “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 Start Printed Page 16734bid or protected offer.” The Commission preliminarily believes that these amendments will enhance the availability and usefulness of the NMS information that is required to be provided under the rules of the national market system for a wide variety of market participants. The Commission also preliminarily believes that expanding the content of NMS information would help to reduce information asymmetries between market participants who rely upon current SIP data and those who purchase proprietary data feeds from the national securities exchanges.[87]

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

B. Proposed Definition of “Consolidated Market Data”

The Commission is proposing to amend Rule 600(b) to add a definition 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]

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.

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] Start Printed Page 16735Pursuant to Rule 608(b), the Commission would publish for comment an amendment to add new consolidated market data elements, and thereafter, the Commission would evaluate any such proposed amendment and approve it if the Commission finds the amendment is “necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the [Exchange] Act.” [97]

The Commission preliminarily believes that the proposed definition of consolidated market data, as well as the other definitions included therein, would, by expanding the NMS information that is required to be provided under the rules of the national market system, support more informed trading and investment decisions by market participants in today's markets and facilitate the best execution of customer orders by the full range of broker-dealers.[98] In addition, the proposed definition would be referenced in the amendments to Rule 603(b) and proposed Rule 614, both of which propose to implement the decentralized consolidation model.[99]

The Commission requests comment on the proposed definition of consolidated market data under proposed Rule 600(b)(19). Throughout this release, we request comment from the points of view of all interested parties. With regard to any comments, we note that such comments are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments.

In particular, the Commission solicits comment on the following:

1. Do commenters believe that the Commission should adopt a definition of consolidated market data? Why or why not? Should the Commission take an alternative approach? Why or why not?

2. Does the proposed definition of consolidated market data capture the market data that would be useful to market participants for trading and regulatory compliance purposes? Please explain. Does the proposed definition of consolidated market data include any market data that should not be included? Please explain. The Commission is seeking input from commenters on whether the proposed definition of consolidated market data should include additional market data or whether the definition should otherwise be modified.

3. Should the definition of consolidated market data be set forth in an effective national market system plan(s) instead of, or in addition to, Rule 600(b)? Please explain. Do commenters have views on the most appropriate process through which the content of proposed consolidated market data should be expanded or modified? Do commenters believe that the proposed definition of consolidated market data should include a provision stating that additional regulatory, administrative, or exchange-specific program data elements can be defined pursuant to the effective national market system plan or plans required under Section 242.603(b)? Please explain. Should the proposed definition of core data be able to be amended through the effective national market system plan process (for example, should the term “core data” be included in proposed Rule 600(b)(19)(v))? Why or why not? Do commenters believe that any data elements should not require an amendment to the effective national market system plan(s) to be added to consolidated market data? Please explain and describe what process would be appropriate for adding any such data elements.

C. Proposed Definition of “Core Data”

Regulation NMS does not currently define core data. Rather, today, core data generally refers to the price, size, and exchange of the last sale; each exchange's highest bid and lowest offer (“BBO”) and the number of shares available at those prices; and the NBBO.[100]

The core data that is provided today by the exclusive SIPs is of considerable utility to some market participants for certain purposes.[101] However, it is of 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]

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 Start Printed Page 16736Exchange Act.[108] The Commission is proposing a definition of core data that would incorporate the information that is currently provided in SIP data as well as additional information, including quotation data for smaller-sized orders for higher-priced stocks, certain depth of book data, and additional auction information.[109] As explained below, the Commission preliminarily believes that each of the new elements of core data, as proposed, would enhance the usefulness of the content of the NMS information that is collected, consolidated, and disseminated under the rules of the national market system.[110]

The Commission is proposing to define core data in Rule 600(b) to include all of the elements that currently are referred to as core data,[111] as well as the following data elements that are not currently provided by the exclusive SIPs: (1) Quotation data for smaller-sized orders for higher-priced stocks (pursuant to a new definition of “round lot”), (2) data on certain quotations below the best bid or above the best offer (pursuant to a new definition of “depth of book data”), and (3) information about orders participating in auctions (pursuant to a new definition of “auction information”). As discussed below, certain OTCBB and corporate bond and index data that are currently provided by the exclusive SIPs would not be included in the proposed definition of core data.[112] Further, as noted above, the proposed term core data is reflected in the proposed definition of consolidated market data, which is referenced in proposed Rule 603(b) and proposed Rule 614.[113]

Specifically, under proposed Rule 600(b)(20), core data would be defined as the following information with respect to quotations for and transactions in NMS stocks: (1) Quotation sizes; (2) aggregate quotation sizes; (3) best bid and best offer; (4) national best bid and national best offer; (5) protected bid and protected offer; (6) transaction reports; (7) last sale data; (8) odd-lot transaction data disseminated pursuant to the effective national market system plan or plans required under Rule 603(b) as of [date of Commission approval of this proposal]; (9) depth of book data; and (10) auction information. For purposes of the calculation and dissemination of core data by competing consolidators, and the calculation of core data by self-aggregators, the best bid and best offer, national best bid and national best offer, and depth of book data would include odd-lots that when aggregated are equal to or greater than a round lot, with such aggregation occurring across multiple prices and disseminated at the least aggressive price.[114] Protected quotations, however, would only include odd-lots at a single price that when aggregated are equal to or greater than 100 shares.[115]

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

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

As discussed above, SIP data currently includes certain data that would not be included in the definition of core data under the Commission's proposed definition.[122] Currently, Nasdaq UTP Plan Level 1 subscribers can obtain OTCBB quotation and transaction feeds for unlisted stocks.[123] Similarly, the CTA Plan permits the dissemination of “concurrent use” data relating to corporate bonds and indexes.[124] This information would not be included in the proposed definitions of core data or consolidated market data. OTCBB stocks, corporate bonds, and Start Printed Page 16737indices are not NMS securities as defined in Regulation NMS [125] and, therefore, the Regulation NMS rules related to the collection, consolidation, and dissemination of information regarding NMS securities, and the NMS plan(s) required under Rule 603(b) for NMS stocks,[126] do not apply. Accordingly, this information is not included in the proposed definition of core data.[127]

However, the Commission's proposed definitions of core data and consolidated market data would not prohibit the independent provision of other types of market data by the SROs, and, as discussed below, under the decentralized consolidation model, competing consolidators would be permitted to collect data from the SROs and offer data products to subscribers that go beyond what is proposed to be defined as core data or consolidated market data. Therefore, the exclusion of OTCBB and concurrent use data from the proposed definitions of core data and consolidated market data does not preclude the provision of this data to market participants who wish to receive it.

Finally, the proposed definition of core data requires that the BBO, NBBO, and the proposed depth of book data include odd-lots that when aggregated are equal to or greater than a round lot, and that such aggregation would occur across multiple prices and be disseminated at the least aggressive price of all such aggregated odd-lots. Several national securities exchanges today have rules that provide for a similar odd-lot aggregation procedure for purposes of providing quotation data to the exclusive SIPs.[128] Although not currently required by Regulation NMS, odd-lot aggregation increases the amount of quotation data that is included in SIP data and provides transparency into trading interest would not otherwise have been represented in such data. The Commission preliminarily believes that this information is important and should uniformly be included in the proposed core data disseminated to investors and market participants.[129] In addition, for similar reasons, the Commission proposes to include odd-lots that, when aggregated, form a round lot for purposes of the new proposed definition of depth of book data.[130]

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

The Commission requests comment on the proposed amendment to Rule 600(b)(20) to introduce a definition of core data. In particular, the Commission solicits comment on the following:

4. Do commenters believe Rule 600 should be amended to include a definition of core data? Why or why not?

5. Do commenters believe that the Commission's proposed definition of core data captures the key components of information with respect to quotations for and transactions in NMS stocks that are useful for participating in today's markets? Are there any other useful market data elements that should be included in the proposed definition? Does the proposed definition include any elements that are not useful for trading? Please explain.

6. Do commenters believe that there is sufficient demand for OTCBB, concurrent use, or other data currently provided by the exclusive SIPs that would not fall within the proposed definition of core data such that an independent market for the provision of this data would develop? Why or why not? Would the SROs or other entities that currently disseminate this data through the exclusive SIPs provide it through other means (i.e., to competing consolidators or directly to interested market participants)? Please explain.

7. The Commission is proposing to include protected quotations in the proposed definition of core data. Do commenters believe that there is a need for a “national protected best bid or offer” analogous to the NBBO that would represent a snapshot of the single best protected bid and single best protected offer from among all the protected bids and offers of each SRO? Would this be a useful metric for competing consolidators to calculate and disseminate for market participants for either routing or regulatory compliance (e.g., the order execution disclosures required under Rule 605) purposes? Would firms that intend to self-aggregate produce such a metric on their own? Please explain.Start Printed 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]

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.

(a) Regulatory Background

Round lot, though not defined in the Exchange Act or Regulation NMS, typically refers to orders or quotes for 100 shares or multiples thereof. Exchange rules typically define a round lot as 100 shares, but they also allow the exchange discretion to define it otherwise.[141] The technical specifications for the Equity Data Plans provide similar definitions. For example, the CTA Plan defines round lot as “[t]ypically 100 shares of stock or any number of shares that is a multiple of 100 (i.e., 100, 600, 1,600, etc.).” [142] The exclusive SIP feeds also disseminate quotation and transaction information for stocks that have a round lot size of 10 or 1.[143]

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

Despite the absence of a round lot definition, other key defined terms in Regulation NMS—such as “bid or offer,” “best bid and best offer,” and “quotation”—refer, directly or indirectly, to round lot. The effect of these references to round lot is that 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]

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 Start Printed Page 16739aggregation process works in different terms and with different levels of specificity,[157] but many exchanges aggregate odd-lots across multiple prices and provide them to the exclusive SIPs at the least aggressive price if the combined odd-lot interest is equal to or greater than a round lot.[158]

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

(b) Market Evolution

In recent years, the share prices of some of the most widely-held stocks have increased substantially.[162] As a result of higher share prices, odd-lot orders in many securities have a high dollar, or notional, value. Because SIP data does not currently include odd-lot quotation information except to the extent that cumulative odd-lot interest equals or exceeds a round lot, the best quote reflected in proprietary data products, especially for many 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]

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]

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]

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 Start Printed Page 16740rose, 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.

(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]

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]

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 Start Printed Page 16741overwhelming market participants with information. This panelist suggested that a “price level metric,” such as including odd-lot orders with a value in excess of a specified price, might make sense.[180]

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

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

(d) Commission Discussion and Proposal

(i) Proposed Definition of Round Lot

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

The Commission preliminarily believes that, to address these and other concerns, certain odd-lot quotation data should be required to be disseminated as part of proposed core data so that it is made more readily available to investors and market participants. The Commission is proposing that this be accomplished by defining the term “round lot” to include certain orders that currently are defined as “odd-lots.” Given the prevalence of odd-lot quoting and trading, particularly in 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]

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 Start Printed Page 16742for the purchase or sale of an NMS stock of 1 share.

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

Table 1

Stock price groupNumber of stocks in stock price groupPercent of ADV, by price group (%)Percent of $ADV, by price group (%)
$0.00-$50.007,18875.0231.70
$50.01-$100.001,09413.6421.06
$100.01-$500.0057511.2043.40
$500.01-$1,000.00140.050.64
$1,000.01 +150.093.19

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

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

Furthermore, higher odd-lot trading rates are associated with higher-priced stocks,[199] and, according to data provided in connection with the Roundtable, odd-lot transaction sizes go down as share price goes up.[200] The proposed tiered, price-based round lot definition is intended to reflect these market dynamics. More specifically, a significant odd-lot transaction market—measured by odd-lot trade frequency—emerges at approximately a $50 share price, and 50% of the odd-lots traded in stocks priced between $50 and $250 are 20 shares or less.[201] This corresponds, approximately, with the proposed 20 share round lot category for stocks priced between $50.01 and $100.00 per share. Moreover, according to data provided in connection with the Roundtable, 20, 10, 2, and 1 share 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.

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:

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Table 2

Stock price groupProposed round lot definitionPortion of all trades less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the proposal (%)
$0.00-$50.00100 shares0
$50.01-$100.0020 shares46
$100.01-$500.0010 shares59
$500.01-$1000.002 shares77
$1,000.01 or more1 share100

Table 3

Stock price groupProposed round lot definitionPortion of all volume transacted in a quantity less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the proposal (%)
$0.00-$50.00100 Shares0
$50.01-$100.0020 Shares89
$100.01-$500.0010 Shares95
$500.01-$1000.002 Shares99
$1,000.01 or more1 Share100

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.

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]

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 Start Printed Page 16744quotations 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.

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

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

Under the proposed definition of round lot, a specialist or OTC market maker would have to include customer limit orders in the new round lot sizes within its published bids and offers. Rule 604 currently applies to round lots and the Commission preliminarily believes that Rule 604 should continue to use round lots, as proposed to be defined, as the measure for customer limit orders that must be reflected in a specialist or OTC market maker's published bid or offer. The Commission preliminarily believes that the objectives of Rule 604 of ensuring that customers have the ability to effectively seek price improvement through the dissemination of their limit orders by specialists or OTC market makers would be furthered by applying the proposed definition of round lot such that those obligations would apply to customer limit orders of meaningful size. Therefore, the Commission preliminarily believes that the customer limit order display requirements of Rule 604 should apply to orders in the new proposed round lot sizes.

Rule 605, which governs the disclosure of order execution quality information, would also be affected by the proposed definition of round lot because of the effect on the definition of NBBO. Rule 605 requires market centers to publish monthly reports containing execution statistics [216] for certain NMS stock orders, including, but not limited to, the “average realized spread,” [217] Start Printed 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]

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.

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

Finally, Rule 201 of Regulation SHO requires, among other things, that trading centers have written policies and procedures reasonably designed to prevent the execution or display of a short sale order of a covered security at a price that is less than or equal to the current national best bid if the price of that covered security decreases by 10% or more from the covered security's closing price as determined by the listing market for the covered security as of the end of regular trading hours on Start Printed Page 16746the prior day.[230] As a result of the proposed definition of round lot, the national best bid would include orders in the proposed round lot sizes. The Commission preliminarily believes that the objectives of Rule 201 of restricting destabilizing short sale orders in rapidly declining markets would be furthered by applying the proposed definition of round lot such that bids of meaningful size would be included within this restriction.[231]

The Commission requests comment on the proposed definition of round lot in proposed Rule 600(b)(81) and the inclusion of additional quotation information for higher priced shares in proposed core data that would result from this proposed definition. In particular, the Commission solicits comment on the following:

8. Should odd-lot quotation data that is not currently reflected in SIP data be incorporated into core data, as proposed, and, if so, what is the best way to do so?

9. Should core data, as proposed, include quotation information for smaller sized orders in higher priced stocks? Why or why not? Does adding this quotation information enhance the usefulness of core data, as proposed? Please explain. What kinds of market participants would use this information? For what purposes? Would the inclusion of this information have any negative or unintended consequences, such as “information overload” effects? Please explain.

10. Do commenters believe the Commission's proposed definition of round lot is an effective way to incorporate this additional quotation information into core data, as proposed? Why or why not? What effect would the proposed definition have on systems capacity? Please explain and provide data. Would the proposed definition affect market complexity? Please explain. Do commenters believe that the proposed definition of round lot appropriately balances the benefits of providing additional quotation data to investors and other market participants against potential costs such as additional system burdens or increased data complexity? If not, please explain how this balance could be more 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?

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 Start Printed Page 16747on 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)?

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.

Whether Rule 611 should be modified or repealed has been the subject of much debate in recent years.[236] Rule Start Printed Page 16748611 was controversial when adopted,[237] with many commenters either opposing the rule entirely or advocating for exceptions, such as for block trades or for those wishing to opt out of the Rule's protections.[238] In the years since, Rule 611 has continued to be the subject of much debate, with some arguing that the rule has negatively impacted equity market structure, others taking the position that any benefits were achieved early on when the Rule induced widespread automated quotations and connectivity, and yet others expressing the view that the Rule continues to play an important role in supporting best execution and retail investor confidence.[239] Recently, a Subcommittee of the Commission's Equity Market Structure Advisory Committee advocated that the EMSAC recommend that the Commission consider repealing Rule 611 on a pilot basis to test its impact.[240]

In light of the concerns about the existing scope of Rule 611, the Commission preliminarily believes that Rule 611 should not be extended to smaller-sized quotations reflected in the proposed definition of round lot. Moreover, the Commission preliminarily believes that extending Rule 611 to the proposed new round lots is not necessary in light of market developments since the adoption of Regulation NMS in 2005. While a substantial amount of trading in 2005 was conducted on relatively slow manual markets,[241] and was 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.

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]

Start Printed 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]

The Commission is also proposing to delete the references to “The Nasdaq Stock Market, Inc.” in the definition of protected bid or protected offer. Since the Nasdaq Stock Market is now a national securities exchange, that language is redundant.

Finally, the locked and crossed markets restrictions of Rule 610 are based on the term “protected quotation.” Specifically, Rule 610(d) requires each national securities exchange and national securities association to establish, maintain, and enforce rules that, among other things, require its members to reasonably avoid displaying quotations that lock or cross any protected quotation in an NMS stock and that prohibit its members from engaging in a pattern or practice of displaying quotations that lock or cross any protected quotation in an NMS stock, absent an applicable exception. Under the proposed amendments to the definition of protected bid or protected offer, “protected quotation” will refer to displayed, automated quotations that are the best bids or offers of at least 100 shares of a national securities exchange or association. As a result, quotations in the new, smaller proposed round lot sizes would not be subject to Rule 610(d) and could be locked or crossed.[255]

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

The Commission requests comment on the proposed amendments to the definition of protected bid or protected offer in proposed Rule 600(b)(69). In particular, the Commission solicits comment on the following:

29. Do commenters believe that the Commission's proposed amendments to the definition of protected bid or protected offer are an effective way to continue to require order protection for 100 share orders but not for smaller orders, or would an alternative be better? Please explain.

30. Do commenters believe that the definition of NBBO should reflect the proposed round lot sizes or should it remain consistent with the 100-share protected quotation? Why or why not?

31. Do commenters believe that Rule 611 should be extended to orders in the smaller round lot sizes set forth in the proposed definition of round lot? Why or why not? If Rule 611 were to be extended to the proposed smaller round lot sizes, would there be any negative or unintended consequences? Please explain in detail.

32. Do commenters believe it would be costly for market participants to adjust procedures and systems to comply with Rule 611 and prevent trade-throughs at the smaller round lot sizes? Please describe the necessary changes and any consequent costs in detail.

33. Do commenters believe it would be costly for market participants to Start Printed Page 16750adjust 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?

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.

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

The proposed definition of round lot does not necessitate changes to the definition of NBBO. However, as discussed further below, the Commission is proposing a decentralized consolidation model where competing consolidators and 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.

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.

The Commission requests comment on the proposed amendments to the definition of national best bid and national best offer in proposed Rule 600(b)(50). In particular, the Commission solicits comment on the following:

37. What are commenters' views on the proposed amendments to the definition of national best bid and national best offer? Do the proposed amendments make appropriate adjustments to the definition to accommodate the proposed introduction of a consolidated market data distribution model with competing consolidators and self-aggregators? Are any additional amendments needed, whether to the definition of NBBO or to other provisions? Please be specific.

2. Depth of Book Data

Core data currently lacks quotation information in NMS stocks beyond the best round lot quotes of each SRO, commonly referred to as the “top of book.” However, as regulatory changes and market developments, such as decimalization, have increased the significance of information on quotes away from the best prices,[266] some have suggested that core data be expanded to include certain depth of book data (i.e., quotations and aggregate size at prices outside the BBO).[267]

The Commission is proposing to define core data to include certain Start Printed 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]

(a) Regulatory Background

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

In adopting Regulation NMS, the Commission considered the scope of quotations to which trade-through protection should apply under Rule 611. The Commission decided to apply Rule 611 to protected quotations [271] but not to depth of book quotations.[272] 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]

(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]

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]

(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 Start Printed Page 16752the importance of depth of book data.[280] One panelist stated that the exclusive SIPs could be upgraded and made “relevant again” by adding depth of book data, which would benefit retail investors by giving them information on which direction a stock may be moving and what type of order they may need to use.[281] Another panelist stated that both his firm and the brokers it employs cannot rely solely on SIP data, as they believe they need depth of book data to have a full view of the market and to trade competitively, particularly with respect to large orders.[282] One commenter stated that the Commission should require depth of book data to be included in SIP data and recommended adding at least five levels of depth.[283]

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

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

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

(d) Commission Discussion and Proposal

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

Accordingly, the Commission preliminarily believes that core data, as proposed, should include certain depth of book data, including aggregated orders at each price between the best Start Printed Page 16753bid and best offer and the protected bid and protected offer (if different), as well as several price levels above and below the protected bid and protected offer. The Commission believes that the number of additional price levels should strike an appropriate balance by significantly enhancing the utility of proposed core data for a wide range of market participants, without risking the excessive message traffic [294] or complexity that might result from the inclusion of full depth of book information in proposed core data. The Commission preliminarily believes that this balance is appropriately struck at five price levels (below and above the protected bid and protected offer) as this would approximate the level of liquidity available to market participants at the best bid or offer prior to decimalization.[295] The Commission is seeking comment on whether and to what extent depth of book data should be included in the proposed definition of core data.

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

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

As proposed, core data would include the best bids and offers and the protected quotes of each exchange, which market participants need to comply with legal and regulatory requirements, such as the duty of best execution and Rule 611. The Commission preliminarily believes that information on any trading interest between the best bids or offers and the protected quotes, if they are different, would be of keen interest to market participants. Therefore, the Commission is proposing to include aggregated quotation sizes at each price where there is a bid or offer in that range in the definition of depth of book data.

However, the Commission preliminarily believes that not all individual quotations away from the best prices should be added to proposed core data. While there may be some market participants that need total visibility into exchange order books, the Commission does not believe, at this time, that complete depth of book data should be required to be made available as proposed core data. The addition of complete, order-by-order depth of book data to proposed core data would represent an enormous volume of information, which could increase latencies in the provision of proposed core data and introduce complexity that might impair the usability of such data for many subscribers. The Commission's proposed definition of depth of book data is intended to incorporate into core data additional quotation information that would be useful to a broad array of market participants for trading [300] and to thereby further the goals of the national market system.[301] The Commission is not supplanting the proprietary depth offerings of the exchanges that contain additional content and that may be more appropriate for certain market participants or more specialized use cases.

The Commission recognizes that market participants have diverse market data needs. The discussions at the Roundtable and the comments received, however, suggest that many market participants need more than the best bids, best offers, and the NBBO disseminated by the exclusive SIPs in order to trade competitively and to optimize the placement of customer orders.[302] As noted above, the Commission's proposed definition of depth of book data seeks to approximate the quotes that market participants were able to access on the exclusive SIPs prior to decimalization, which the Commission preliminarily believes would significantly enhance the usefulness of proposed core data. The Commission preliminarily believes that its proposed definition of depth of book data strikes a balance between enhancing the usefulness of core data for the many market participants that cannot rely entirely on SIP data, and limiting the amount of data disseminated to limit complexity and the processing demand on systems for market participants that do not need full depth of book visibility.[303] The Start Printed Page 16754proposed definition of depth of book seeks to balance the needs of different market participants, while reducing the information asymmetries that exist today in the provision of SIP data and proprietary data.

Staff believes that there is a substantial amount of quotation volume several levels below the best bid and above the best offer. For example, staff reviewed depth of book quotations for corporate stocks using data from July 19, 2019. This analysis revealed that for this day, indeed, there was substantial quotation volume several levels below the best bid (the ask side was not examined). During active parts of the trading day, there is quotation interest at every $0.01 increment at least ten levels out for the most liquid stocks; for the least liquid stocks, there is a large gap between the best bid and the next highest bid, and large gaps are generally also present between the next several bid levels. This is consistent with the Commission's proposal to define the depth of book price levels as the first five levels “at which there is a bid or offer,” rather than alternatives such as a fixed $0.05 band around the best quotes, since the former would capture much of the depth of book quotation information for less liquid stocks.[304] In addition, the staff review found a significant percentage of the total notional value of all depth of book quotations for both liquid and illiquid stocks falls within the first five price levels. The Commission preliminarily believes that requiring aggregated quotation information at the first five price levels above and below the protected quote range is a reasonable way to delineate the trading interest that would be useful to a variety of market participants to support more effective quoting and trading. On the other hand, while quotations at price levels further away from the best bid and offer may be relevant for market participants handling very large orders or orders in highly illiquid securities for which liquidity at the top of the book and the next five price levels is not sufficient to fully execute the order, the Commission preliminarily believes that liquidity at price levels further away is less likely to provide relevant or immediately actionable information to many market participants.[305]

While some market participants have stated that depth of book data is necessary to fulfill their best execution obligations, other commenters disagreed and pointed out that the Commission previously stated that depth of book data is not necessary for best execution.[306] Several factors are considered in determining whether a broker-dealer has “use[d] reasonable diligence to ascertain the best market” [307] for a customer order and fulfilled its best execution obligations.[308] The Commission is not stating that a broker-dealer must always use all proposed depth of book data, under all circumstances, to provide best execution to its customers. However, the Commission preliminarily believes that the expanded set of proposed core data, including the proposed depth of book data, provides additional information that in many circumstances would be useful to a broker-dealer's best execution analysis.[309]

Where liquidity is distributed over multiple price points and less liquidity is available at the top of book,[310] depth 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]

Start Printed 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]

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.

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-Start Printed Page 16756lots aggregates into a round lot, similarly represents trading interest of meaningful size and should be displayed at the most conservative price at which such trading interest could be accessed.[324]

The Commission requests comment on the proposed inclusion of depth of book data in the proposed definition of core data and the definition of depth of book data in proposed Rule 600(b)(25). In particular the Commission solicits comment on the following:

38. Should depth of book data be included in the proposed definition of core data? Why or why not? Do commenters believe the proposed definition of depth of book data would have any negative or unintended consequences? Why or why not?

39. Do commenters believe that the Commission's proposed definition of depth of book data captures the appropriate level of depth data that should be included in the proposed definition of core data? Why or why not? Should the Commission include more or fewer levels of depth or otherwise revise the definition to capture the key depth information that would be useful to market participants? For example, should the Commission require depth only within a $0.05 band of the protected bid and offer rather than the first five price levels at which there is interest?

40. Does the proposed definition of depth of book data adequately balance the need for more information against potential increases in complexity and processing demand that might result from the addition of such depth of book data? If not, where is this balance most appropriately struck in terms of the extent of depth of book data that should be included in the proposed definition of core data? Particularly, what processing demands would be associated with including varying levels of depth of book data? Please consider the proposed five levels of depth of book as well as any other possible depth of book alternatives. Please provide quantitative data and analyses to support your comments.

41. Do commenters believe that the “at which there is a bid or offer” language in the Commission's proposed definition of depth of book data establishes an appropriate minimum 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.

(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]

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 Start Printed Page 16757that 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]

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.

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] Start Printed Page 16758NYSE Arca,[339] and Cboe BZX [340] provide auction information that is available only through each exchange's proprietary market data products.

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

(b) Comments and Roundtable Discussion

In connection with the Roundtable, several panelists and commenters supported the addition of auction information to SIP data.[342] For example, one commenter stated that the Commission should require the inclusion of auction order imbalance information in SIP data and expressed the view that doing so should not materially increase the operating costs of the exclusive SIP.[343]

Similarly, other panelists and commenters emphasized the importance of auction information, including for achieving best execution.[344] One panelist indicated that auctions are becoming more important and that institutional investors use auction imbalance data to trade.[345] Another panelist stated that auction imbalance information is important for retail investors, particularly high-net worth individuals, because the amount of the imbalance may be significant to a trading decision.[346]

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

(c) Commission Discussion and Proposal

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

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

As discussed above, market participants rely upon auction information for effective participation in opening, closing, and reopening auctions.[354] Accordingly, the Commission preliminarily believes that full auction-related information should be included in the proposed definition of core data. Specifically, under proposed Rule 600(b)(5) of Regulation NMS, “auction information” would be defined as all information specified by national securities exchange rules or Start Printed Page 16759effective national market system plans that is generated by a national securities exchange leading up to and during an auction, including opening, reopening, and closing auctions, and disseminated during the time periods and at the time intervals provided in such rules and plans.

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

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

Some Roundtable panelists objected to the inclusion of auction information in core data. For example, as previously noted, Nasdaq asserted that its crossing process is its intellectual property and that auction data is already widely available to retail investors on Nasdaq's website and through other data vendors.[357] Although some 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.

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 Start Printed Page 16760closing 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]

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. 78 o-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]

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 Start Printed Page 16761more competing consolidators (rather than from a single plan processor as is currently the case) or, if aggregating consolidated market data itself, to make determinations as to whether a Short Sale Circuit Breaker has been triggered.

Due to the changes proposed herein (i.e., a listing market would now have the ability to choose from one or more competing consolidators for proposed consolidated market data, or to aggregate proposed consolidated market data on its own), the Commission preliminarily believes that a trading center, including a listing market, should consider updating its written policies and procedures required under Rule 201(b) to address the source of core data that it uses in making its determination regarding whether the Short Sale Circuit Breaker has been triggered and any changes to that source of core data, including the underlying reason for such change. The Commission preliminarily believes that these types of updates to such written policies and procedures would assist a listing market in ensuring consistency in making its determination regarding whether the Short Sale Circuit Breaker has been triggered and avoiding any appearance of “gaming” or “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).

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).

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.

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 Start Printed Page 16762provide 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.

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.

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.

The proposed definition of regulatory data would also require an exchange or association on which an NMS stock is traded to provide other data pertaining to regulatory requirements, including sub-penny execution indicators and trade-though exempt indicators. Additional regulatory messages such as these are included in the technical specifications of the Equity Data Plans. The Commission preliminarily believes that all of these regulatory messages provide important information to the market and facilitate compliance with regulatory requirements. Therefore, the Commission preliminarily believes that such regulatory messages should be included in the proposed definition of consolidated market data.

Finally, as discussed above,[379] as the markets continue to evolve, there may be a need to reflect new regulatory data elements in proposed consolidated market data. Accordingly, the Commission is proposing that the definition of regulatory data include a provision (as set forth in proposed consolidated market data) that would allow the definition of regulatory data to be amended to include additional regulatory data elements pursuant to amendments to effective national market system plan(s). As discussed above, amendments to effective national market system plans must be filed with, and approved by, the Commission pursuant to Rule 608(b).

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

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 Start Printed Page 16764associations, 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).

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

In addition, to the extent that an exchange, at its own discretion, determines to develop a new 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.

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 Start Printed Page 16765that 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.

A. Existing Centralized Consolidation Model

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

For many years, this centralized consolidation model served investors well by providing an accurate, reliable, and fair stream of SIP data that was considered prompt relative to the prevailing technological standards of the time. Technological advances as well as the order routing and trading strategies that developed in response to the adoption of Regulation NMS have greatly increased the speed and automation of both markets and common trading strategies. These changes, along with the provisions adopted in Regulation NMS that allow for the sale of proprietary data products,[391] have created incentives for exchanges to develop enhanced proprietary data products that they sell 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]

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

Geographic latency, as used herein, refers to the time it takes for data to travel from one physical location to another, which must also take into account that data does not always travel between two locations in a straight line. Greater distances usually equate to greater geographic latency, though geographic latency is also affected by the mode of data transmission, as discussed below. The Commission understands that geographic latency is typically the most significant component of the additional latency that SIP data feeds experience compared to proprietary data feeds.[394] Because each exclusive SIP must collect data from geographically-dispersed SRO data centers, consolidate the data, and then disseminate it from its location to 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]

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 Start Printed Page 16766example, 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]

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]

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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]

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]

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 Start Printed Page 16768pay 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.

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]

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.

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.

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 Start Printed Page 16769with the maintenance of fair and orderly markets.[425] Accordingly, this change would subject competing consolidators to the requirements of Regulation SCI. Under this new proposed decentralized consolidation model, the SROs would be required to provide their NMS information to competing consolidators and self-aggregators and the existing exclusive SIP model would cease.

The Commission preliminarily believes that the implementation of a decentralized consolidation model with competing consolidators and 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.

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]

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.

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 Start Printed Page 16770data necessary for the proposed consolidated market data.[434]

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

The Commission seeks to ensure that consolidated market data is widely available for reasonable fees.[436] In discharging its statutorily mandated review function, the Commission must assess the proposed fees and determine whether they are fair and reasonable, and not unreasonably discriminatory.[437] The Commission must have “sufficient information before it to satisfy its statutorily mandated review function”—that the fees meet the statutory standard.[438] The Commission has previously stated that fees for consolidated SIP data can be shown to be fair and reasonable if they are reasonably related to costs.[439]

The exchanges would be able to offer different access options (e.g., with different latencies, throughput capacities, and data-feed protocols) to market data customers, but any access options available to proprietary data customers must also be available to competing consolidators and 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.

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 Start Printed Page 16771as 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.

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

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

The Commission requests comment on the proposed amendments to Rule 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 Start Printed Page 16772preliminarily 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.

(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]

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

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

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

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

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(b) Comments and Roundtable Discussion

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

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

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

Several comment letters submitted in connection with the Roundtable expressed support for a competing consolidator model.[471] One commenter stressed the importance to investors of competition by stating that competition would result in the reduction of the latency differential between the exclusive SIPs and proprietary data feeds, resilience through the use of multiple consolidators, and lower market data costs.[472] Another commenter stated that competing consolidators would compete on “speed, reliability, and price to the benefit of traders and investors alike” [473] and that competing consolidators would provide “the benefit of expanded access to 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]

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]

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 Start Printed Page 16774a conflict could arise if a broker-dealer executes customer orders and also manages the price against which such trades are benchmarked, i.e., by calculating the NBBO.[487]

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

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

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

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

(c) Commission Discussion

The Commission is proposing a decentralized consolidation model with competing consolidators and 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.

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]

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

First, to address the Commission's prior concern about a lack of data uniformity resulting from the use of multiple competing consolidators,[500] the Commission is proposing requirements governing how consolidated market data is collected, calculated, generated, and made available.[501] The Commission acknowledges that the introduction of multiple entities generating consolidated market data would result in multiple versions of consolidated market data. However, market participants currently consolidate proprietary data feeds, generate their own consolidated data, and calculate their own NBBO.[502] The proposal Start Printed Page 16775would require competing consolidators and self-aggregators to calculate consolidated market data, including the NBBO, in a consistent manner as set forth in the proposed definitions in Rule 600 of Regulation NMS, which the Commission preliminarily believes would help ensure continuity and consistency in how proposed consolidated market data, including the NBBO, is calculated.

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

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

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

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

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

The Commission believes that there are a number of existing firms that Start Printed Page 16776would be well-positioned to become competing consolidators. First, trading technology firms that today provide proprietary data aggregation services for their subscribers may decide to register as competing consolidators in order to potentially expand their subscriber base and to be eligible for the pricing for data content used to create proposed consolidated market data.[516] In addition, the existing exclusive SIPs, CTA/CQ and Nasdaq UTP, could consider becoming competing consolidators, as they have extensive experience in this area and may choose to remain in the market data consolidation business. Similarly, SROs have experience collecting and processing market data and may wish to act as competing consolidators. The Commission preliminarily believes that the creation of a competing consolidator market would open up the potential for other entrants, as well. For example, various market participants that are currently self-aggregating and have the technology to consolidate core data may decide to enter the competing consolidator business given the potential market opportunity. Finally, other entities have been interested in performing as plan processors. For example, there were competing bids to be the Nasdaq UTP SIP in 2014,[517] and in 2013 and 2019 for OPRA. The bidding firms (or similar types of firms) may decide to enter the market as competing consolidators.

The Commission preliminarily believes that sufficient incentives exist to attract a number of entities to register as competing consolidators and for a competitive market to develop. For one thing, the proposed definition of core data will incorporate additional elements such as quotation data in smaller size increments, depth of book data, and auction information, all of which market participants have recommended as necessary or useful. Therefore, there seems to be demand for the key product—i.e., consolidated market data as proposed—that competing consolidators will be producing and selling. Moreover, the proposed competing consolidator registration regime and responsibilities outlined below—while designed to collect relevant information about competing consolidators and to require competing consolidator performance data, data quality issues, and system issues to be made publicly available—are intended to be a relatively streamlined process that would impose appropriate burdens on entities likely to register as competing consolidators.

Several Roundtable panelists and commenters raised potential issues about a competing consolidator model, in particular, about uncertainties regarding control over market data access, the costs of obtaining market data from the various SROs, and operational complexities associated with the model, such as the introduction of multiple NBBOs.[518] However, the Commission preliminarily believes that some of these issues would be addressed by the proposal and the others would not be novel or insurmountable. On control over market data access, Rule 603 and the proposed amendments to Rule 603(b) would require that the SROs directly make available to competing consolidators and self-aggregators NMS information, including all data necessary to generate consolidated market data, on terms that are fair and reasonable and not unreasonably discriminatory. With respect to the costs of market data, the SRO fees associated with consolidated market data would be subject to Equity Data Plan requirements and the fees must be fair and reasonable.[519] Finally, with respect to the concerns regarding the complexities associated with a competing consolidator model, many of the functions of competing consolidators are performed today by market participants, such as the consolidation of proprietary data feeds and calculation of NBBOs.[520]

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

(d) Proposed Definition of Competing Consolidator in Rule 600(b)

The Commission is proposing to introduce a definition of competing consolidator in Rule 600(b). Specifically, under proposed Rule 600(b)(16) of Regulation NMS, a competing consolidator would be defined as a securities information processor required to be registered pursuant to Rule 614 or a national securities exchange or national securities association that receives information with respect to quotations for and transactions in NMS stocks and generates consolidated market data for dissemination to any person.

The Commission requests comment on the proposed amendment to Rule 600(b) to introduce a definition of “competing consolidator.” In particular, the Commission solicits comment on the following:

73. Is a decentralized consolidation model with competing consolidators and self-aggregators a viable and/or appropriate model for the collection, consolidation, and dissemination of consolidated market data? Are there any other viable and/or appropriate alternatives?

74. Do commenters believe that the definition of competing consolidator accurately captures the requisite functions necessary for collecting, consolidating, and disseminating consolidated market data? Do commenters believe that there would be sufficient interest in entities that would become competing consolidators?

75. Do commenters believe that competing consolidators would provide the necessary competition to lower the processing time and distribution speeds Start Printed Page 16777for 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]

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

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

(i) Section 11A(b) of the Exchange Act

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

The registration process for exclusive SIPs under Section 11A requires the Commission to publish notice of an exclusive SIP's application for registration and, within 90 days of publication of notice of the application, Start Printed Page 16778by order grant the application or institute proceedings to determine whether the registration should be denied.[531] At the conclusion of the proceedings, the Commission must, by order, grant or deny the registration.[532] Section 11A(b)(1) of the Exchange Act also authorizes the Commission, by rule or by order, upon its own motion or by application, to conditionally or unconditionally exempt any SIP or class of SIPs from any provision of Section 11A or the rules or regulations thereunder if the Commission finds that such exemption is consistent with the public interest, the protection of investors, and the purposes of Section 11A, including the maintenance of fair and orderly markets in securities and the removal of impediments to and perfection of the mechanisms of a national market system. The Commission preliminarily believes that it is consistent with the public interest, the protection of investors, and the purposes of Section 11A to use its authority under Section 11A(b)(1) to exempt SIPs that wish to act as competing consolidators from the registration process established in Section 11A(b)(3) of the Exchange Act and to allow such competing consolidators to register pursuant to a process that is more streamlined and limited than the process described in Section 11A(b)(3). The process specified in Section 11A(b)(3) of the Exchange Act was developed for exclusive SIPs and reflects the heightened need to review and analyze exclusive processors. In contrast, SIPs that do not act as an exclusive SIP are exempt from registration unless the Commission “finds that the registration of such securities information processor is necessary or appropriate in the public interest, for the protection of investors, or for the achievement of the purposes of [Section 11A].” The Commission preliminarily believes that the proposed registration process would provide the Commission with the information necessary to oversee competing consolidators and help ensure that relevant information regarding such competing consolidators is available to the Commission and to the public, while providing a streamlined registration process designed to encourage entities to register as competing consolidators.

The registration process proposed in new Rule 614 requires any person, other than an SRO,[533] that chooses to become a competing consolidator to file with the Commission proposed Form CC.[534] The Commission would review the initial Form CC and such filing would become effective, unless declared ineffective by the Commission by order.[535] The Commission would make public on its website each effective initial Form CC and any order of ineffective initial Form CC, amendment to Form CC and notice of cessation, if applicable. The registration process proposed in new Rule 614 would not require the publication for notice and comment of an application for registration as a competing consolidator, nor would it require Commission approval of such an application. However, the Commission preliminarily believes that it is consistent with the public interest, the protection of investors, and the purposes of Section 11A to establish a relatively streamlined registration process based on disclosure for those SIPs that wish to act as competing consolidators. The Commission preliminarily believes that a relatively streamlined registration process would impose minimal burdens on entities likely to register as competing consolidators.

In addition, the Commission preliminarily believes that it is consistent with the public interest, the protection of investors, and the purposes of Section 11A to use its exemptive authority under Section 11A(b)(1) of the Exchange Act to exempt those SIPs that act as competing consolidators from Section 11A(b)(5) of the Exchange Act,[536] which requires a registered SIP to notify the Commission if the SIP prohibits or limits any person with respect to access to its services. Section 11A(b)(5) allows any person aggrieved by a prohibition or limitation of such access to the SIP's services to petition the Commission to review the prohibition or limitation of access. Exclusive SIPs, by definition, engage on an exclusive basis in collecting, processing, or preparing data. In contrast, the proposed competing consolidators would not engage in collecting, processing, or preparing data on an exclusive basis. Therefore, the Commission preliminarily believes that the protections of Section 11A(b)(5) of the Exchange Act, including the ability of an aggrieved person to petition the Commission for review of a SIP's prohibition or limitation of access to the SIP's services, are not necessary for the SIPs that register as competing consolidators. The Commission preliminarily believes that competitive forces would reduce the likelihood that a subscriber would not be able to access consolidated market data as proposed because a subscriber should be able to obtain such data from another competing consolidator. Accordingly, the Commission preliminarily believes that it would be consistent with the protection of investors and the public interest to exempt competing consolidators from Section 11A(b)(5) of the Exchange Act.

The Commission requests comment on the proposal to establish a registration process for SIPs that wish to act as competing consolidators and to exempt such competing consolidators from Section 11A(b)(5) of the Exchange Act. In particular, the Commission solicits comment on the following:

79. Do commenters agree that the SIPs that wish to act as proposed competing consolidators should be required to register with the Commission? Do commenters agree that such competing consolidators should be subject to the proposed registration requirements in proposed Rule 614, rather than the registration requirements set forth in Section 11A(b) of the Exchange Act? Why or why not?

80. Do commenters believe that the Commission should establish a registration process for competing consolidators different from the registration process in proposed Rule 614? If so, please describe. Should competing consolidator registration be subject to Commission approval and/or additional or different regulation? Why or why not? If so, please describe.

81. Do commenters believe that competition and market forces would be sufficient to support the proposed registration regime for SIPs that wish to act as competing consolidators? Why or why not?

82. Do commenters agree that the Commission should exempt SIPs that register as competing consolidators from Section 11A(b)(5) of the Exchange Act? Why or why not?

83. Do commenters believe that competition and market forces are Start Printed Page 16779sufficient 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.

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

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

In addition, proposed Rule 614(a)(1)(ii) would establish a uniform manner in which the Commission would receive, and competing consolidators would provide, reports made pursuant to proposed Rule 614. The standardization would make it easier and more efficient for the Commission to promptly review and analyze the information that competing consolidators provide.

Proposed Rule 614(a)(1)(iii) would provide that the Commission may, by order, declare an initial Form CC filed by a competing consolidator ineffective no later than 90 calendar days from filing with the Commission.[541] The Commission preliminarily believes that 90 calendar days would provide the Commission with adequate time to carry out its oversight functions with respect to its review of an initial Form CC, including its responsibilities to protect investors and maintain fair, orderly, and efficient markets.

Proposed Rule 614(a)(1)(iv) would require a competing consolidator to withdraw an initial Form CC that has not become effective if any information disclosed in the initial Form CC is or becomes inaccurate or incomplete. The competing consolidator would be able to refile an initial Form CC pursuant to proposed Rule 614(a)(1). The Commission preliminarily believes that it would be appropriate to require an initial Form CC to be withdrawn if any information in the form is or becomes inaccurate or incomplete to assure that the Commission's review is based on accurate and complete information and to assure that the Commission has adequate time to review an accurate and complete initial Form CC.

Proposed Rule 614(a)(1)(v)(A) would provide that an initial Form CC would become effective, unless declared ineffective, no later than the expiration of the review period provided in paragraph (a)(1)(iii) and upon publication of the initial Form CC pursuant to proposed Rule 614(b)(2)(i).

Proposed Rule 614(a)(1)(v)(B) would provide that the Commission would declare ineffective an initial Form CC if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest and is consistent with the protection of investors. The Commission also preliminarily believes that it would be necessary and appropriate in the public interest, and consistent with the protection of investors, to declare ineffective an initial Form CC if it finds, after notice and opportunity for hearing, that one or more disclosures reveal 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, Start Printed Page 16780currency, or completeness. The Commission preliminarily believes that market participants would use the Form CC disclosure to understand and evaluate the operations of a competing consolidator and to help determine whether to subscribe to a competing consolidator. A disclosure on Form CC that is materially deficient with respect to its completeness or comprehensibility could mislead market participants or impede their ability to evaluate a competing consolidator. In addition, the Commission intends to use the information disclosed on an initial Form CC to exercise oversight over competing consolidators. Given these potential uses, the Commission believes that it is important that an initial Form CC contain disclosures that are accurate, current, and complete. During its review, the Commission and its staff may provide comments to the applicant and may request that the applicant supplement information in its initial Form CC or revise its disclosures on its initial Form CC.[542]

If the Commission declares an initial Form CC ineffective, the applicant would be prohibited from operating as a competing consolidator. An initial Form CC declared ineffective would not prevent the competing consolidator from subsequently filing a new Form CC that attempted to address any disclosure deficiencies or other issues that caused the initial Form CC to be declared ineffective.

The Commission requests comment on proposed Rule 614(a)(1), which establishes filing requirements for an initial Form CC and a Commission review period for determining whether a filed initial Form CC should be declared ineffective. In particular, the Commission solicits comment on the following:

84. Do commenters believe that the proposed electronic filing requirement is appropriate? Are there methods other than EFFS that would be appropriate? If so, please describe. Is EFFS an efficient system for filing proposed Form CC? Would another system be more efficient? If so, please specify and describe the rationale for using a different system.

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.

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]

Start Printed 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?Start Printed 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]

The Commission preliminarily believes that the proposed provisions are both necessary and appropriate because they reflect the main obligations of competing consolidators, which are to collect, calculate, and disseminate consolidated market data, as proposed. In addition, the use of a competing consolidator at a specific data center would likely be more accurate and useful in assessing the trading activity of a trading participant in that same data center. As proposed, competing consolidators would be the only entities providing proposed consolidated market data to market participants. Accordingly, the terms by which they provide proposed consolidated market data to their subscribers must not be unreasonably discriminatory.[546]

The Commission requests comment on proposed Rules 614(d)(1)-(3). In particular, the Commission solicits comment on the following:

96. Do these provisions reflect the main obligations of competing consolidators? Should there be any other obligations?

97. Competing consolidators would be required to generate proposed consolidated market data, which would include the calculation of an NBBO consistent with the process outlined in the definition of NBBO in Rule 600(b)(42). Do commenters believe that the definition of NBBO would ensure the calculation of consistent NBBOs by competing consolidators?

98. Do commenters believe that competing consolidators should be required to develop a consolidated market data product that contains all of the data elements provided under the proposed definition of consolidated market data? Why or why not? Could there be some competing consolidators that only offer a subset of the proposed consolidated market data? Please explain.

Proposed Rule 614(d)(4) would require each competing consolidator to timestamp the information collected in proposed Rule 614(d)(1): (i) Upon receipt from each national securities exchange and national securities association at the exchange's or association's data center; (ii) upon receipt of such information at its aggregation mechanism; and (iii) upon dissemination of consolidated market data to customers. The Commission understands that the existing SIPs similarly timestamp information in accordance with proposed Rule 614(d)(4)(i) and (iii). The Commission preliminarily believes that the proposed rule is appropriate because it would allow subscribers to ascertain a competing consolidator's realized latency (i.e., how quickly the competing consolidator can receive data from the exchanges, transmit that data between the exchange's data center and its aggregation center, and aggregate and disseminate proposed consolidated market data to subscribers). This information provides transparency that should help subscribers evaluate a potential competing consolidator or determine whether an existing competing consolidator continues to meet their needs.[547]

The Commission is also proposing several rules, described below, that would require public disclosure of metrics and other information concerning the performance and operations of a competing consolidator. The information that the Commission is Start Printed Page 16783proposing that competing consolidators publish is based upon information that is currently produced by the CTA/CQ SIP and the Nasdaq UTP SIP, either for public or internal distribution.[548] Because this information is useful to current users of the exclusive SIPs and participants of the Equity Data Plans, the Commission preliminarily believes that it should be made publicly available [549] by competing consolidators. The Commission preliminarily believes that public disclosure and accessibility of this information would help market participants to evaluate the merits of a competing consolidator by providing transparency into the services and performance, and resiliency of each competing consolidator, and could also lower search costs for market participants and enhance competition. In addition, the Commission preliminarily believes that the public disclosure of this information—particularly the system availability and network delay statistics and data quality and system issues—would help to ensure that competing consolidators have a demonstrated ability to provide consolidated market data in a stable and resilient manner.

Proposed Rule 614(d)(5) would require each competing consolidator to publish prominently on its website, within 15 calendar days after the end of each month, certain performance metrics. All information posted pursuant to proposed Rule 614(d)(5) must be publicly posted in downloadable files and must remain 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.

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.

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 Start Printed Page 16784identify the information and provide an explanation.

104. Do commenters believe a requirement for the competing consolidators to publish historical performance data should be included in proposed Rule 614(d)(5) and proposed Rule 614(d)(6)? If yes, for what time periods should historical data be required to be published?

The Commission is proposing several rules that would require competing consolidators to provide and maintain information for regulatory purposes. Proposed Rule 614(d)(7) would require each competing consolidator to keep and preserve at least one copy of all documents, including all correspondence, memoranda, papers, books, notices, accounts, and such other records as shall be made or received by it in the course of its business as such and in the conduct of its business.[553] The proposed rule would require competing consolidators to keep these documents for a period of no less than five years, the first two years in an easily accessible place. Proposed Rule 614(d)(8) would require each competing consolidator to, upon request of any representative of the Commission, promptly furnish to the possession of such representative copies of any documents required to be kept and preserved by it.[554] These requirements would facilitate the Commission's oversight of competing consolidators and the national market system.

The Commission requests comment on proposed Rules 614(d)(7) and (d)(8). In particular, the Commission solicits comment on the following:

105. Do commenters believe that the documents required to be kept and preserved by proposed Rule 614(d)(7) are appropriate for competing consolidators? If not, please explain. Are there any other documents that should be kept and preserved by competing consolidators?

106. Do commenters believe that the recordkeeping time periods required by proposed Rule 614(d)(7) are appropriate for competing consolidators? If not, what would be more appropriate recordkeeping time periods?

107. Do commenters believe that proposed Rule 614(d)(8), which requires competing consolidators to provide copies of any documents required to be kept and preserved to any representative of the Commission upon request, is appropriate for competing consolidators? If not, please explain.

The Commission is proposing to define “business day” for purposes of proposed Rule 614 to comport with provisions contained in Rule 19b-4 and to specify the conditions under which filings required pursuant to Rule 614 are deemed to have been made on a particular business day. Specifically, the Commission proposes to define “business day” in the same manner in which it is defined in Rule 19b-4(b)(2).[555] The Commission preliminarily believes that these provisions providing a date-of-filings standard would facilitate the ability of competing consolidators to comply with the requirements of Rule 614 and facilitate the ability of the Commission to effectively receive, review, and make public the filings required under proposed Rule 614.

The Commission requests comment on proposed Rules 614(a)(4)(i) and (a)(4)(ii). In particular, the Commission solicits comment on the following:

108. Do commenters believe that the definition of business day in proposed Rule 614(a)(4)(i) is appropriate? Why or why not? Would any alternative definition of business day be preferable? Please explain.

109. Do commenters believe that the standards set forth in proposed Rule 614(a)(4)(ii) regarding when a filing or publication requirement is deemed to have occurred on a particular business day are appropriate? Why or why not? Would any alternative standards be preferable? Please explain.

(iii) Proposed New Form CC

Proposed new Form CC includes a set of instructions for its completion and submission. These instructions are attached to this release, together with proposed Form CC. Proposed Form CC would require competing 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.

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 Start Printed Page 16785consolidator'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 Start Printed Page 16786the Commission's oversight of securities market technology infrastructure. The key market participants that are currently subject to Regulation SCI are called “SCI entities” and include certain SROs (including stock and options exchanges, registered clearing agencies, FINRA and the Municipal Securities Regulatory Board) (“SCI SROs”); alternative trading systems that trade NMS and non-NMS stocks exceeding specified volume thresholds (“SCI ATSs”); the exclusive SIPs (“plan processors”); and certain exempt clearing agencies.[558] Regulation SCI, among other things, requires these SCI entities to establish, maintain, and enforce written policies and procedures reasonably designed to ensure that their key automated systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets, and that such systems operate in accordance with the Exchange Act and the rules and regulations thereunder and the entities' rules and governing documents, as applicable.[559] Broadly speaking, Regulation SCI also requires SCI entities to take appropriate corrective action when systems issues occur; provide certain notifications and reports to the Commission regarding systems problems and systems changes; inform members and participants about systems issues; conduct business continuity and disaster recovery testing and penetration testing; conduct annual reviews of their automated systems; and make and keep certain books and records.[560]

Regulation SCI applies primarily to the systems of, or operated on behalf of, SCI entities that directly support any one of six key securities market functions—trading, clearance and settlement, order routing, market data, market regulation, and market surveillance (“SCI systems”).[561] With respect to security, Regulation SCI also applies to systems that, if breached, would be reasonably likely to pose a security threat to SCI systems (“indirect SCI systems”).[562] In addition, certain systems that raise concerns about single points of failure (defined as “critical SCI systems”) are subject to certain heightened requirements.[563]

When adopting Regulation SCI, the Commission included within the scope of Regulation SCI those entities “that play a significant role in the U.S. securities markets and/or have the potential to impact investors, the overall market, or the trading of individual securities.” [564] The Commission identified by function the key market participants it believed were integral to ensuring the stability, integrity, and resiliency of securities market infrastructure.[565] As discussed below, “plan processors” are currently among those entities that are subject to Regulation SCI. Under Regulation SCI, “plan processors” have the meaning set forth in Regulation NMS.[566] Thus, currently, the exclusive SIPs, or plan processors of the Equity Data Plans and the OPRA Plan, are subject to Regulation SCI.[567] The Commission included plan processors within the scope of Regulation SCI because the Commission believed that such entities, because they are exclusive processors and providers of key market data pursuant to a national market system plan, are central features of the national market system and serve an important role within the national market system in operating and maintaining computer and communications facilities for the receipt, processing, validating, and dissemination of quotation and/or last sale price information.[568]

The Commission preliminarily believes that competing consolidators, because they would be sources of consolidated market data, even if not exclusive sources of such data, would similarly serve an important role in the national market system, and therefore should be subject to the requirements of Regulation SCI. When adopting Regulation SCI, the Commission explained that Regulation SCI would apply not only to exclusive providers of consolidated market data, but also to the market data systems of SCI SROs, stating, “both consolidated and proprietary market data systems are widely used and relied upon by a broad array of market participants, including institutional investors, to make trading decisions, and [] if a consolidated or a proprietary market data feed became unavailable or otherwise unreliable, it could have a significant impact on the trading of the securities to which it pertains, and could interfere with the maintenance of fair and orderly markets.” [569] The Commission preliminarily believes that if a consolidated market data feed of a competing consolidator became unavailable or otherwise unreliable, it could have a significant impact on the trading of NMS stocks and/or the market participants subscribing to its data feeds, and could possibly interfere with the maintenance of fair and orderly markets. A systems issue could occur at a competing consolidator (e.g., a systems disruption that prevented the competing consolidator from disseminating consolidated market data to its subscribers, a systems intrusion that impacted the quality of the data being disseminated, or another cybersecurity incident, such that certain market participants or the securities markets broadly could be significantly impacted until such time that the issue was resolved at the competing consolidator, or the end user (or its market data vendor, if applicable) was able to implement any backup arrangements with an alternative competing consolidator. As detailed further below, the Commission is requesting comment on whether all of the obligations set forth in Regulation SCI should apply to competing consolidators, or whether only certain requirements should be imposed, such as those requiring written policies and procedures, notification of systems problems, business continuity and disaster recovery testing (including testing with participants/subscribers of a competing consolidator), and penetration testing.

In addition, the Commission is proposing to revise the definition of “critical SCI system,” to take account of competing consolidators, which, as proposed, would not be exclusive providers of consolidated market data. Currently, subparagraph (1)(v) of the Start Printed Page 16787definition of “critical SCI systems” includes those SCI systems of, or operated on behalf of, an SCI entity that directly support functionality relating to “the provision of consolidated market data.” The Commission is proposing to revise this subparagraph to apply to those systems that directly support functionality relating to “the provision of market data by a plan processor.” The proposed revised language in subparagraph (1)(v) is intended to identify as critical SCI systems only those market data systems that perform an exclusive market data dissemination function pursuant to an NMS plan. Accordingly, the scope of “critical SCI systems” would still capture single points of failure within the national market system. Under the current consolidation model, because the exclusive SIPs represent such single points of failure, they are all subject to heightened requirements as “critical SCI systems.” However, because the competing consolidator model is designed to result in multiple viable sources of consolidated market data, and would not be initiated until a transition period was complete,[570] the Commission preliminarily believes that including systems of such competing consolidators within the scope of “critical SCI systems” would not be necessary. With multiple competing consolidators operating in the national market system, the systems of competing consolidators would be subject to the standard (i.e., as SCI systems that are not critical SCI systems) requirements of Regulation SCI, whereas the proposed revised definition of “critical SCI systems” would address single point of failure concerns.

Because the competing consolidator model would not apply with respect to trading in options, the definition of “critical SCI systems” must still account for the systems of OPRA's plan processor, whose systems would continue to be “critical SCI systems.” In addition, to avoid confusion with the term “consolidated market data”—which is proposed to be defined to include (1) core data, (2) regulatory data, (3) administrative data, (4) 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]

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

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

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

Rule 1001(c) of Regulation SCI requires SCI entities to establish, maintain, and enforce reasonably designed written policies and procedures that include the criteria for identifying responsible SCI personnel, the designation and documentation of responsible SCI personnel, and Start Printed Page 16788escalation procedures to quickly inform responsible SCI personnel of potential SCI events.[581] Rule 1000 of Regulation SCI defines “responsible SCI personnel” to mean, “for a particular SCI system or indirect SCI system impacted by an SCI event, such senior manager(s) of the SCI entity having responsibility for such system, and their designee(s).” [582] Rule 1000 also defines “SCI event” to mean an event at an SCI entity that constitutes a system disruption, a systems compliance issue, or a systems intrusion.[583] Rule 1001(c)(2) of Regulation SCI requires that SCI entities periodically review the effectiveness of these policies and procedures, and take prompt action to remedy any deficiencies.[584]

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

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

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

Rule 1005(b) of Regulation SCI relates to the recordkeeping requirements of competing consolidators related to compliance with Regulation SCI.[594] Start Printed Page 16789Rule 1006 of Regulation SCI provides for certain requirements relating to the electronic filing, on Form SCI, of any notification, review, description, analysis, or report to the Commission required to be submitted under Regulation SCI.[595] Finally, Rule 1007 of Regulation SCI contains requirements relating to a written undertaking when records required to be filed or kept by an SCI entity under Regulation SCI are prepared or maintained by a service bureau or other recordkeeping service on behalf of the SCI entity.[596]

The Commission requests comment on the proposed inclusion of competing consolidators in Regulation SCI and the related revisions to Rule 1000 of Regulation SCI. In particular, the Commission solicits comment on the following:

117. Do commenters believe that Regulation SCI should apply to competing consolidators? If so, do commenters believe that the proposed revisions to Rule 1000 of Regulation SCI are appropriate? Why or why not? Is there a potential for a systems issue at a competing consolidator to have an adverse impact on the maintenance of fair and orderly markets? If so, what do commenters believe would be the most effective way to mitigate that potential?

118. Do commenters believe that competing consolidators could play a significant role in the U.S. securities markets such that they should be defined as SCI entities? Why or why not? What do commenters believe are the risks related to subscribers associated with systems issues at a competing consolidator? What impact would a systems issue have on the trading of securities and the maintenance of fair and orderly markets? Do commenters believe that all requirements set forth in Regulation SCI should apply to competing consolidators? Why or why not?

119. Unlike other types of SCI entities, ATSs are only subject to Regulation SCI if they meet certain volume thresholds set forth in the definition of “SCI ATS.” Do commenters similarly believe there is a threshold size, or a threshold for significant market share, at which Regulation SCI should apply to a competing consolidator? For example, the definition of SCI ATSs contains a two-pronged volume threshold test measured over a “four out of six-month” period to determine whether an 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 Start Printed Page 16790latency 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.

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.

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]

(a) Roundtable Discussion and Comments

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

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

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

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(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]

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]

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 Start Printed Page 16792regulating a national market system (or a subsystem thereof).” The Equity Data Plans, which are the effective national market system plans for NMS stocks,[610] historically have played an important role in developing, operating, and governing the national market system.[611] The proposed decentralized consolidation model would fundamentally change the national market system and the role of the Equity Data Plans.[612] Under the decentralized consolidation model, the effective national market system plan(s) for NMS stocks, would continue to play an important but modified role in the national market system.[613] Therefore, the Commission is proposing in Rule 614(e) that an amendment to the effective national market system plan(s) be filed with the Commission to conform the plan(s) to the decentralized consolidation model, to address the application of timestamps by the SROs, to require annual assessments of competing consolidators' performance, and to develop a list of the primary listing market for each NMS stock, as discussed below. Proposed Rule 614(e) would require the participants to the effective national market system plan(s) for NMS stocks to submit an amendment pursuant to Rule 608 to conform the plan(s) to the proposed decentralized consolidation model within 60 calendar days from the effective date of Rule 614.

As discussed above, today, the Equity Data Plans operate the exclusive SIPs for the collection, consolidation, and dissemination of SIP data.[614] In the decentralized consolidation model, the effective national market system plan(s) for NMS stocks would no longer be responsible for collecting, consolidating, and disseminating consolidated market data and would no longer operate an exclusive SIP.[615] Instead, the participants of the effective national market system plan(s) for NMS stocks would develop and file with the Commission the fees for SRO data content required to be made available by each SRO to competing consolidators and self-aggregators for the creation of proposed consolidated market data, including fees for SRO market data products that contain all of the components of proposed consolidated market data as well as the fees for market data products that contain only a subset of the components of proposed consolidated market data.[616] The effective national market system plan(s) would also collect fees for the SRO data content used to create the proposed consolidated market data; [617] and allocate the revenues among the SRO participants. The effective national market system plan(s) would also oversee plan accounts and plan audits for purposes of billing, among other things.[618]

Rule 614(e)(1) would direct the participants to file with the Commission an amendment to the effective national market system plan(s) for NMS stocks in order to conform the plan(s) to reflect the proposed consolidated market data and proposed decentralized consolidation model. The Commission preliminarily believes that to conform to the proposed decentralized consolidation model, the effective national market system plan(s) for NMS stocks would need to be amended to reflect the fees for the proposed consolidated market data. The proposed new fees would need to reflect the following: (i) That proposed consolidated market data includes the content described above, including depth of book data, auction information, and additional information on orders of sizes smaller than 100 shares; (ii) that the effective national market system plan(s) for NMS stocks is no longer operating an exclusive SIP and is no longer performing aggregation and other operational functions; and (iii) that the SROs are no longer responsible for the connectivity and transmission services required for providing data to the exclusive SIPs from the SROs' data centers since the exclusive SIPs will no longer be operated by the effective national market system plan(s) for NMS stocks.[619] The proposed new fees for consolidated market data must be fair and reasonable and not unfairly discriminatory.[620] The proposed fees must be submitted by the participants of the effective national market system plan(s) for NMS stocks pursuant to Rule 608 under the Exchange Act. In addition, to conform the effective national market system plan(s) for NMS stocks to the proposed decentralized consolidation model, the amendment to the plan(s) generally should include a harmonized approach to data billing protocols, including with respect to any unified multiple installations, single users (“MISU”) policy.[621]

Proposed Rule 614(e)(1)(ii) would require the participants to file a proposed amendment to the effective national market system plan(s) for NMS stocks to address the application of timestamps by the SRO participants on proposed consolidated market data, including the time the proposed consolidated market data was generated by the SRO participant and the time the SRO participant made the proposed consolidated market data available to competing consolidators and 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] Start Printed Page 16793The Commission understands that the SROs currently submit timestamped data under the SIP plans [623] and the National Market System Plan Governing the Consolidated Audit Trail (“CAT NMS Plan”).[624]

Proposed Rule 614(e)(1)(iii) would require the participants to file a proposed amendment to the effective national market system plan(s) for NMS stocks to reflect that the participants would need to conduct an annual assessment of the overall performance of competing consolidators, including speed, reliability, and cost of data provision and provide the Commission with a report of such assessment on an annual basis. As noted above, the Equity Data Plans play an important role in governing the operation of the national market system. The Commission preliminarily believes that the effective national market system plan(s) for NMS stocks should continue in this important role by monitoring the overall performance of competing consolidators to seek to ensure that the decentralized consolidation model is operating soundly. To aid the Commission's monitoring, the Commission is requiring the effective national market system plan(s) for NMS stocks to provide assessments in key factors of competing consolidators, including: Speed of the competing consolidators in receiving, calculating, and disseminating proposed consolidated market data; the reliability of the transmission of proposed consolidated market data; and a detailed cost analysis of the provision of proposed consolidated market data. The effective national market system plan(s) would base their assessments on publicly available information about the competing consolidators, including the information that each competing consolidator would be required to make available under proposed Rule 614.

Finally, proposed Rule 614(e)(1)(iv) would require the participants to file an amendment to the effective national market system plan(s) for NMS stocks to include a list that identifies the primary listing exchange for each NMS stock. As discussed above, primary listing exchanges will be required to collect, calculate, and provide the data included in the proposed definition of “regulatory data” to competing consolidators and self-aggregators. Moreover, the Commission is proposing to define “primary listing exchange” in proposed Rule 600(b)(67) as “for each NMS stock, the national securities exchange identified as the primary listing exchange in the effective national market system plan or plans required under § 242.603(b).” The effective national market system plan(s) for NMS stocks must accordingly be amended to include this list so that the primary listing exchange for each NMS stock—and the responsibilities regarding the collection, calculation, and provision of regulatory data—are clear. The Commission preliminarily believes that information regarding the primary listing exchange for each NMS stock is 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.Start Printed 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.

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]

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.

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 Start Printed Page 16795regulatory 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.

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.

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]

(a) Comments and Roundtable Discussion

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

Two other panelists expressed interest in considering the distributed SIP model.[640] One panelist said that the Start Printed Page 16796distributed SIP model could address the latencies of the current centralized consolidation model.[641] Another panelist suggested that a distributed SIP model with enhanced content, such as auction imbalance and depth of book information, would be useful [642] and that even a fiber optics connection could be sufficient for a distributed SIP model since the consolidated market data would no longer have to travel throughout the various data centers for collection and distribution.[643]

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

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

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

(b) Commission Discussion

The Commission preliminarily believes that a distributed SIP model could address the geographic latencies that exist in the current centralized consolidation model but is concerned that the distributed SIP model has certain fundamental shortcomings that make it a less desirable option compared to the proposed competitive, decentralized consolidation model. In particular, the distributed SIP model does not allow for the introduction of competitive forces and continues to allow for one exclusive SIP to have exclusive rights for the dissemination of market data for the NMS stocks on a given consolidated tape. Because the distributed SIP model does not introduce competitive forces, it is less likely to adequately address the broader array of latencies and competitive product and service offerings.

In addition, insofar as the distributed SIP model does not allow for the provision of all three consolidated tapes to be consolidated and disseminated from a single entity, it retains the inefficiencies that would not apply to a competing consolidator model, such as the need for end-users to obtain data from multiple SIPs.[650]

As a result, the Commission preliminarily believes that, since the distributed SIP model could result in significant additional costs and complexity and would not be likely to competitively address all forms of content and latency differentials, the Commission preliminarily believes that the distributed SIP model is not the optimal solution for the provision of consolidated market data.

The Commission requests comment on the distributed SIP alternative. In particular, the Commission solicits comment on the following:

153. Is the distributed SIP alternative a viable or superior alternative to the proposed competing consolidator and self-aggregator model? If so, please describe the benefits of the distributed SIP model and why that model is the preferred alternative.

2. Single SIP Alternative

Another suggestion to modify the centralized consolidation model to address latency concerns was to combine the exclusive SIPs into a single exclusive SIP for all exchange-listed securities.[651] Comments noted that such a change would permit the harmonization of exclusive SIP infrastructure [652] and narrow the latency difference between the exclusive SIPs and proprietary data feeds.[653] One commenter thought this alternative would be a low cost alternative.[654]

In light of the fact that the Nasdaq UTP SIP has less latency that the CTA/CQ SIP, within the current exclusive and centralized exclusive SIP model, this solution has certain merits. It could allow for an upgrade to existing processor technology for the CTA/CQ SIP, which continues to lag the performance of the Nasdaq UTP SIP. It could also eliminate certain inefficiencies in having two separate exclusive SIPs for SIP data. Potentially having a single administrator and exclusive SIP could ease these burdens and introduce benefits such as a less complex infrastructure and greater standardization.

However, this alternative has certain key shortcomings. For one thing, it does not attempt to introduce competitive forces, and, therefore, as with the distributed SIP alternative, would not necessarily be expected to fully address all forms of latency in a competitive data environment. Further, it does not attempt to address geographic latency, which, as noted, is believed to be the most significant source of latency undermining the viability of the current centralized exclusive SIP model.

The Commission requests comment on these alternative approaches to the current centralized consolidation Start Printed Page 16797model. In particular, the Commission solicits comment on the following:

154. Is the single exclusive SIP alternative a viable alternative to addressing the concerns with the current centralized consolidation model? If so, please describe the operation of the single exclusive SIP alternative and how it would address the latency and cost concerns arising from the centralized consolidation model. Are there any other viable alternatives?

155. Do commenters believe that the single centralized exclusive SIP model could be a viable solution despite the fact that it would not introduce competitive forces into the provision of consolidated data and would not address geographic latency? If so, please describe any factors that make this solution as good as or better than the proposed decentralized model.

V. Paperwork Reduction Act

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

A. Summary of Collection of Information

The proposed rules and rule amendments would include a collection of information within the meaning of the PRA for competing consolidators who would be required to comply with the provisions of Rule 614 and file a Form CC with the Commission. In addition, SROs would be required to collect information that they would then have to provide to competing consolidators and self-aggregators for the purposes to generating proposed consolidated market data. Finally, the SROs would be required to amend the effective national market system plan(s) required under Rule 603(b).

1. Registration Requirements and Form CC

Proposed Rule 614(a)(1)(i) would require each competing consolidator to register with the Commission by filing Form CC electronically in accordance with the instructions contained on the form.[657] To file a form CC, a competing consolidator would need to access the Commission's EFFS, a secure website operated by the Commission. Each competing consolidator would have to submit an application and register each individual who would access the EFFS system on behalf of the competing consolidator. Proposed Rule 614(a)(1)(ii) would require any reports required under proposed Rule 614 to be filed electronically on Form CC, include all of the information as prescribed in Form CC and contain an electronic signature. Proposed Rule 614(a)(1)(iv) would require a competing consolidator to withdraw an initial Form CC during its review by the Commission if information on the initial Form CC is or becomes inaccurate or incomplete. Under proposed Rule 614(a)(2)(i), a competing consolidator would be required to amend an effective Form CC in accordance with the instructions therein: (i) Prior to the implementation of a material change to pricing, connectivity or products offered; and (ii) no later than 30 calendar days after the end of each calendar year to correct information that has become inaccurate or incomplete for any reason. Proposed Rule 614(a)(3) would require a competing consolidator to provide notice of its cessation of operations on Form CC at least 30 business days before the date the competing consolidator ceases to operate as a competing consolidator.

2. Competing Consolidator Duties and Data Collection

Proposed Rules 614(d)(1)-(4) would require each competing consolidator to: (1) Collect from each national securities exchange and national securities 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) Start Printed Page 16798message 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.

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 Start Printed Page 16799provide 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]

(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 Start Printed Page 16800information 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.

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.

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]

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 Start Printed Page 16801effectiveness 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.

(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]

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

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

2. Competing Consolidator Duties and Data Collection

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

(a) Initial Burden Hours and Costs for Market Data Aggregation Firms

There are a number of technology firms that provide proprietary market data aggregation services. The Commission preliminarily believes that Start Printed Page 16802some 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.

(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] Start Printed Page 16803for 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.

(c) Initial Implementation Burden Hours and Costs for the Exclusive SIPs

The Commission preliminarily believes that the CTA/CQ SIP and the Nasdaq UTP SIP could choose to become competing consolidators due to their years of experience in collecting, consolidating and disseminating market data. The systems used by the exclusive SIPs already collect, consolidate and disseminate SIP data. Therefore, the Commission preliminarily believes that the exclusive SIPs would not have to build entirely new systems to comply with Rules 614(d)(1)-(d)(4). For example, each exclusive SIP would incur burden hours and external costs to expand their bandwidth and connections to consume and disseminate proposed consolidated market data as well as to transmit it, and to program feed handlers to receive and normalize the different formats of the data feeds developed by the exchanges.[690] Further, each exclusive SIP would expend external costs on purchasing proposed consolidated market data and on colocation fees at the exchange data centers.

However, the exclusive SIPs may have to make a greater scope of changes to become competing consolidators than market data aggregation firms. For this reason, the Commission has estimated initial burden hour and external cost estimates that are higher than those estimated for market data aggregation firms.

The Commission preliminarily believes that each exclusive SIP would 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.

(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 Start Printed Page 16804costs [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.

(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.

(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.Start Printed 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).

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]

Since the Commission preliminarily believes that there may be four SROs that will choose to become competing consolidators, it is estimating that these SROs will incur an aggregate estimate of 2,160 annual ongoing burden hours [719] and $19,577,780 in annual ongoing external costs.[720] The Commission solicits comment on the accuracy of this information.

(g) Initial Burden and Costs for Proposed Rule 614(c)

As discussed above, proposed Rule 614(c) would require each competing consolidator to make public on its website a direct URL hyperlink to the Commission's website that contains each effective initial Form CC, order of ineffective initial Form CC, and amendments to effective Form CCs. The Commission preliminarily estimates an initial burden of 0.5 hours per competing consolidator to publicly post the Commission's direct URL hyperlink to its website upon filing of the initial Form CC,[721] for an aggregate initial burden of approximately six hours for the competing consolidators to publicly post the direct URL hyperlink to the Commission's website on their own respective websites.[722]

(h) Ongoing Burden and Costs for Proposed Rule 614(c)

The Commission preliminarily believes that each competing consolidator would check the Commission's website whenever it submits amendments to effective Form CCs to ensure that the Commission's direct URL hyperlink that the competing consolidator has posted to its own website remains valid. The Commission preliminarily believes that a competing consolidator will file two amendments per year, so the Commission preliminarily estimates that each competing consolidator will incur an ongoing burden of 0.25 hours per amendment, or 0.5 hours per year, to ensure that it has posted the correct direct URL hyperlink to the Commission's website on its own website,[723] for an aggregate annual Start Printed Page 16806burden of approximately six hours for the competing consolidators to do so.[724]

3. Recordkeeping

(a) Initial Burden and Costs

Proposed Rule 614(d)(7) would require each competing consolidator to keep and preserve at least one copy of all documents made or received by it in the course of its business and in the conduct of its business. These documents must be kept for a period of no less than five years, the first two years in an easily accessible place. Proposed Rule 614(d)(8) would require each competing consolidator to promptly furnish these documents to any representative of the Commission upon request. Based on the Commission's experience with recordkeeping costs and consistent with prior burden estimates for similar provisions,[725] the Commission preliminarily estimates that this requirement will create an initial burden of 40 hours (for a total cost of $8,720),[726] for a total initial burden of 480 hours for all respondents (for a total cost of $104,640).

(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]

(b) Ongoing Burden and Costs

The Commission estimates that each competing consolidator would incur an average burden of 11 hours to prepare and make publicly available a monthly report in the format required by proposed Rules 614(d)(5) and (d)(6) (for a total cost of $3,768.50), or a burden of 132 hours per year (for a total cost of $45,222).[731] Once a report is posted on an internet website, the Commission does not estimate that there would be an additional burden to allow the report to remain posted for the period of time specified in the rules. The total burden per year for all competing consolidators to comply with the monthly reporting requirement in proposed Rules 614(d)(5) and (d)(6) is estimated to be 1,584 hours (for a total cost of $542,664).[732]

5. Amendment to the Effective National Market System Plan(s) for NMS Stocks

As discussed above, the proposed rule would require an amendment to the effective national market system plan(s) for NMS stocks from the 16 national securities exchanges and one national securities association respondents who are participants in the effective national market system plan(s). The Commission preliminarily estimates that it would take the participants to the effective Start Printed Page 16807national market system plan(s) approximately 420 hours to prepare the amendment. This preliminary estimate includes 210 hours for a respondent to comply with the timestamps required by the proposed rule, including a review and any applicable change of the respondent's technical systems and rules. Each SRO already employs some form of timestamping, and the Commission does not necessarily expect that the burden to comply with the timestamp requirement would be particularly burdensome.[733] The preliminary estimate also includes 105 hours for the participants to compose the form of annual report on competing consolidator performance. Finally, the preliminary estimate includes 20 hours the participants to compile and confirm the primary listing exchange for each NMS stock. The initial burden hours for all respondents would be 420 hours × 17 (for a total cost of $2,977,380).[734]

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.

(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]

(b) Ongoing Burden and Costs

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

E. Collection of Information Is Mandatory

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

F. Confidentiality

1. Registration Requirements and Form CC

As discussed above, under proposed Rule 614(b)(2), the Commission would make public via posting on the Commission's website each: (i) Effective initial Form CC, as amended; (ii) order of ineffectiveness of a Form CC; (iii) filed Form CC Amendment; and (iv) notice of cessation.

2. Competing Consolidator Duties and Data Collection and Maintenance

The collection of information regarding competing consolidator duties and data collection and maintenance relates to the proposed consolidated market data that competing consolidators will collect, calculate, and provide to subscribers.

3. Recordkeeping

The collection of information relating to recordkeeping would be available to the Commission and its staff, and to other regulators.

4. Reports and Reviews

The collection of information regarding reports and reviews relates to information that would be published on competing consolidator websites.Start Printed 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.

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]

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

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

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

As stated above, the Commission also preliminarily believes that 4 of the entities that may register to become competing consolidators may be either: (i) An SRO currently subject to Regulation SCI; or (ii) an entity affiliated with an SCI SRO, formerly subject to Regulation SCI. The burden estimates for SCI entity respondents include both initial burdens for new SCI entities and ongoing burdens for all SCI entities.[747] Because these SRO entities that would become competing consolidators are current SCI entities and are already required to implement the requirements of Regulation SCI with regard to SCI systems that they operate in their role as Start Printed Page 16809SCI SROs, the Commission preliminarily believes that these entities would not have initial burdens equivalent to those estimated for new SCI entities. At the same time, as discussed above, the Commission preliminarily believes that these SROs may be a national securities association and/or equities national securities exchanges that do not currently operate an exclusive SIP. Because these entities would be entering an entirely new business and performing a new function with new SCI systems, unlike the current exclusive SIPs who may register to become competing consolidators discussed above, the Commission preliminarily believes that these SRO entities would have some initial burden that would be a percentage of that which entirely new SCI entities have. In particular, the Commission preliminarily estimates that the initial burdens for existing SCI SROs who register as competing consolidators would be 50 percent of the estimated initial burdens for entirely new SCI entities. For example, the Commission believes that such SCI SROs would need to develop and draft the policies and procedures required by Rule 1001(a) for new SCI systems utilized in their role as competing consolidators, but unlike completely new SCI entities, SCI SROs would already have existing Rule 1001(a) policies and procedures in place for other types of SCI systems that they could utilize as a model and modify as needed for new SCI systems.[748] The Commission also believes that the estimated ongoing paperwork burden estimates for all SCI entities would be applicable to these entities as well.[749]

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

H. Request for Comments

Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to:

156. Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility;

157. Evaluate the accuracy of our estimates of the burden of the proposed collection of information;

158. Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected;

159. Evaluate whether there are ways to minimize the burden of collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology; and

160. Evaluate whether the proposed amendments would have any effects on any other collection of information not previously identified in this section.

Persons submitting comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Vanessa Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File Number S7-03-20. Requests for materials submitted to OMB by the Commission with regard to this collection of information should be in writing, with reference to File Number S7-03-20 and be submitted to the Securities and Exchange Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication.

VI. Economic Analysis

A. Introduction and Market Failures

1. Introduction

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

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

In general, the Commission preliminarily believes that the proposed amendments would result in benefits by enhancing the consolidated market data content, reducing the latency of consolidated market data, and improving the dissemination of Start Printed Page 16810consolidated market data. This would reduce information asymmetries that exist between market participants who subscribe to proprietary DOB and other proprietary products and market participants who only subscribe to SIP data, and could allow some market participants who subscribe to the more expensive proprietary DOB products to replace them with potentially cheaper consolidated market data feeds. Improvements to the content and latency of consolidated market data from the proposed amendments could also help market participants that currently rely on SIP data to make more informed trading decisions, which would facilitate their ability to trade competitively and improve their execution quality, and would facilitate best execution.

The Commission preliminarily believes there are three main benefits from the expanded content of consolidated market data, which as noted above includes proposed “core data.” First, the expanded content of consolidated market data could allow market participants that currently only subscribe to SIP data to get additional content from expanded consolidated market data and to experience increased gains from trade by allowing them to take advantage of trading opportunities they may not have been aware of due to the lack of information in existing SIP data.[754] Second, the expanded content of consolidated market data could also allow these market participants to improve their order routing and order execution capabilities, potentially lowering investor transaction costs. Finally, the expanded consolidated market data content and associated changes in how the NBBO and protected quotes are calculated could result in a narrower NBBO and wider protected quote in some stocks. A narrower NBBO and changes in protected quotes could affect price improvement that trading venues, including ATSs, exchanges, and internalizers, could offer.

The Commission preliminarily believes that there are costs to expanding the content of consolidated market data, including costs to new competing consolidators related to upgrading existing infrastructure in order to handle the dissemination of the increased message traffic; upgrading software and trading systems that consume consolidated market data; costs to market participants receiving consolidated market data from technological investments required to handle increased content and message traffic; as well as other costs. Expanding consolidated market data would also result in transfers among various market participants, including transfers from the current beneficiaries of asymmetric information associated with the uneven distribution of market data to market participants who currently do not have access to the additional information contained in proprietary DOB products and other proprietary products. There could also be costs to SROs associated with the dissemination of consolidated market data.

With respect to the introduction of the decentralized consolidation model, the Commission has several reasons to believe that it is likely that a sufficient number of firms would be willing to enter the space of competing consolidators so that the market would be competitive. Under this assumption, the potential economic benefits of the proposed decentralized consolidation model would include a reduction in the latency differential that exists between SIP data and proprietary data feeds (as measured at the location of market participants using the data) and potential improvements in innovation and efficiency in the consolidated market data delivery space. Moreover, the fees for proposed consolidated market data could be lower than fees that market participants pay for similar depth of book data today because today market participants would need to subscribe to both the exclusive SIPs and proprietary data feeds to receive the same content that would be included in proposed consolidated market data. However, the Commission recognizes that there is uncertainty in the fees for proposed consolidated market data because they would depend on the structure of fees ultimately proposed for data content by an effective national market system plan(s) and on the ultimate fee structure of competing consolidators.[755] The Commission also recognizes uncertainty in the fees that subscribers choosing to receive a subset of consolidated market data would pay under the proposed rule and that these subscribers could pay higher or lower fees than they do today for equivalent data.

At the same time, the introduction of the decentralized consolidation model would impose direct costs on SROs, the existing exclusive SIPs, and potential competing consolidators. It would also 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 Start Printed Page 16811the 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]

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

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

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

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

B. Baseline

The Commission has assessed the likely economic effects of the proposed amendments, including benefits, costs, and effects on efficiency, competition, and capital formation, against a baseline that consists of the existing regulatory process for collecting, consolidating, and disseminating market data, and the structure of the markets for SIP data products and for connectivity and trading services.

1. Current Regulatory Process for Equity Data Plans and SIP Data

As discussed above,[772] the current regulatory framework for SIP data relies upon a centralized consolidation model, whereby the SROs provide certain quotation and transaction information for each NMS stock to a single exclusive SIP, which then consolidates this data and makes it available to market participants.[773] This SIP data includes what historically has commonly been Start Printed Page 16812referred to as core data, as well as certain regulatory data related to Commission and SRO rules and NMS plan requirements.[774]

As discussed in more detail below,[775] SIP data currently includes transaction information for both round lot and 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]

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

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

2. Current Process for Collecting, Consolidating, and Disseminating Market Data

As discussed above,[782] in addition to the provision of SIP data pursuant to the Equity Data Plans, the national securities exchanges separately sell their individual proprietary market data products directly to market participants via proprietary data feeds. Proprietary data feeds may include SIP data elements and a variety of additional data elements and can vary in content from proprietary top of book products to proprietary depth of book products.[783] In addition, in connection with proprietary data feed products, the exchanges offer various connectivity services (e.g., co-location at primary data centers, fiber optic connectivity, wireless connectivity, and point-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.

(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.

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, Start Printed Page 16813such as information required by the LULD Plan,[794] information relating to regulatory halts and MWCBs,[795] information regarding short sale circuit breakers,[796] and other data, such as data relating to retail liquidity programs, market and settlement conditions, the financial condition of the issuer, OTCBB data, last sale prices for corporate bonds, and information about indices.[797]

The exchanges separately sell their individual market data directly to market participants via proprietary data feeds. For example, the exchanges have developed proprietary DOB products that provide greater content (e.g., 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]

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]

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

Additionally, the staff analysis, referenced above, found that a significant portion of quotation and trading activity occurs in odd-lots, particularly for frequently traded, 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.

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

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

The Commission recognizes that market participants have diverse market data needs. Depth of book data can assist SORs and electronic trading systems with the optimal placement of orders across markets. Specifically, depth of book data can help market participants improve trading strategies and lower execution costs by placing liquidity taking orders that are larger than the displayed best bid or best offer Start Printed Page 16814and achieve queue priority for liquidity providing orders that post at prices away from the best bid or offer.[813] At the same time, the depth of book data may be less valuable to a certain segment of market participants (e.g., retail or non-professional customers). For example, a relatively small portion of orders execute at prices outside the NBBO indicating that some market participants do not find “walking the book” useful.[814]

Finally, yet another gap between SIP data and proprietary DOB data is that SIP data includes only limited 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).

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]

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

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

(b) Current Process for Dissemination of SIP Data and Proprietary Data Feeds

As discussed above,[823] today SIP data is disseminated to investors and market participants through a centralized consolidation model with an exclusive SIP for each NMS stock, centrally collecting market data transmitted from the dispersed SRO data centers and then redistributing the consolidated market data to market participants who are often in different locations. The SROs typically transmit their market data through fiber optic cables to the SIPs.[824]

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

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

Geographic latency refers to the time it takes for data to travel from one physical location to another. Greater distances usually equate to greater geographic latency, though geographic latency is also affected by the mode of data transmission. The Commission understands that geographic latency is typically the most significant component of the additional latency that SIP data feeds experience compared to proprietary data feeds.[828] Because each exclusive SIP must collect data from geographically-dispersed SRO data centers, consolidate the data, and then Start Printed Page 16815disseminate 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]

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

Although exclusive SIPs are tasked with calculating and disseminating the NBBO, at each particular instant the NBBO being used by various market participants could be different due to market participants using proprietary data feeds. In particular, because of geographic and aggregation latencies, market participants that aggregate proprietary data feeds internally or that purchase proprietary data feeds from market data aggregators are likely to have NBBO quotes different from each other and different from the NBBO quote distributed by the exclusive SIPs.

Transmission latency refers to the time interval between when data is sent (e.g., from an exchange) and when it is received (e.g., at an exclusive SIP and/or at the data center of the subscriber), and the transmission latency between two fixed points is determined by the transmission communications technology through which the data is conveyed. Transmission latency also 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]

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

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

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

(c) Current Costs of Generating SIP Data and Proprietary Data Feeds

As mentioned above,[841] currently the exclusive SIPs consolidate and disseminate SIP data to market participants. The data fees that exclusive SIPs charge to market participants for obtaining SIP data are set by the operating committees of the Equity Data Plans.[842] A portion of the Start Printed Page 16816SIP data revenues is used to pay for the cost of maintaining and administering the exclusive SIP,[843] and the remaining funds are distributed to the SRO members proportionately to their trading and quoting activity.[844] In the case of the UTP SIP, there is an additional FINRA cost for the oversight of the OTC markets that is also taken out of the exclusive SIP's revenues before distributing funds to the plan participants.

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

There are three categories of content fees that depend on how market participants access SIP data. First, if SIP data is displayed for market participants on computer screens or other devices, the market participant is charged a display fee (a professional or a 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.

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

The Commission preliminarily believes that there is a substantial difference between the fees market participants pay for SIP data and the fees they pay for proprietary DOB data products. For instance, monthly 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]

As mentioned above,[857] market participants who purchase proprietary data feeds from multiple SROs may Start Printed Page 16817choose to self-aggregate multiple data feeds, or, alternatively, they can purchase already consolidated data from market data aggregators. The exchanges charge a data fee to any market participant that purchases exchanges' data from market data aggregators.[858] Therefore, these fees are effectively a part of the total price that a market participant must pay when purchasing data from a market data aggregator. In some cases, these fees may be so high that only a subset of market participants can afford to self-aggregate proprietary feeds from all exchanges or purchase market data aggregator products.[859] The Commission preliminarily believes that more active market makers and some sophisticated broker-dealers including a number of HFT firms and some of the larger banks with proprietary data feed trading desks either self-aggregate or purchase aggregation services or products from third-party vendors.

Based on Commission staff expertise, the Commission understands that the data fees the exchanges charge to market participants that purchase the exchanges' data from market data aggregators may account for a significant portion of the total price market participants pay for the market data aggregators' data products. However, the Commission does not have information on the pricing of market data aggregators' data and cannot break down market data product prices between the direct data fees charged by the exchanges and the fees charged by market data aggregators for their services; the Commission invites comments on the issue.

Among other fees, the exchanges charge fees for various connectivity services they offer (e.g., co-location, fiber connectivity, and wireless connectivity). Connectivity services permit a customer to access an exchange's proprietary market data and/or its trading and execution systems as well as SIP data. The purchase and use of certain connectivity services is necessary to directly access an exchange's market data and to directly participate in that market, at least for those market participants that represent the vast majority of trading activity on exchanges. Additionally, these connectivity services may be needed in order to take advantage of the reduced latencies offered by the proprietary data feeds, including when market participants prefer the contents of SIP data consolidated from the proprietary data feeds—rather than delivered by an exclusive SIP—to avoid additional latencies.

Connectivity fees can be substantial. For instance, the annual fiber connectivity fees per port at the exchanges' primary data centers are $90,000 at Cboe, $120,000 at Nasdaq, and $168,000 at NYSE.[860] Co-location services may have two components: An initial fee and an ongoing monthly fee based on the kilowatt (kW) usage. For example, at NYSE an initial fee for a dedicated high-density cabinet that consumes 9kW per month is $5,000, and an ongoing monthly fee per kW is $1,050.[861] At Nasdaq, an initial fee is $3,500, and an ongoing monthly fee is $4,500.[862] Thus, for a year of co-location in a dedicated cabinet with 9kW power, these fees add up to over $118,000 for NYSE and over $57,000 for Nasdaq.

(d) Current Aggregate Exchange Revenues From Selling Market Data and Connectivity

The Commission estimates that in 2018 the exchanges earned a total revenue of approximately $941 million from selling both proprietary and SIP market data products and connectivity services in the equities market. In addition, the Commission estimates that the exchanges earned approximately $596 million of this $941 million revenue from selling market data products and approximately $345 million of this revenue from selling connectivity services. With respect to the revenue from market data products, the Commission estimates that in 2018 the exchanges earned approximately $327 million of the $596 million revenue from equity SIP data and approximately $269 million from selling proprietary data products. Further, approximately $63 million of the $327 million equity SIP revenue in 2018 was distributed to FINRA.[863]

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

3. Competition Baseline

This section discusses, as it relates to this rulemaking, the current state of the market for core and SIP data products, the market for proprietary data Start Printed Page 16818products, 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]

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.

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]

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]

Start Printed 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.

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

(b) Current Structure of Market for Proprietary Market Data Products

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.

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

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

(c) Current Structure of Market for Connectivity Services

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

As mentioned above, the exchanges offer different connectivity options to transmit market data to market participants. These options may include fiber optics connections, wireless microwave connections, and laser transmission, all of which vary in speeds and reliability.[891] The fastest and more reliable connections (e.g., laser transmission) offer market participants an advantage over other market participants with slower or less reliable connections. Therefore, the Commission preliminarily believes that the Start Printed Page 16820exchanges 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.

(d) Current Structure of the Market for Trading Services in NMS Stocks

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

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

During the same time period, the proportion of NMS stocks trading 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]

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.

The Commission understands that broker-dealers in particular compete with each other to provide the lowest possible execution costs for their clients (i.e., high execution quality) as quickly as possible.

An example of routing tools as noted above is smart order routing (“SOR”). SORs employ the use of algorithms (e.g., by broker-dealers on behalf of a client) designed to optimally send parts of an order (child orders) to various market centers (e.g., exchange and ATSs) so as to optimally access market liquidity while minimizing execution costs. SORs help to determine how to quickly access (“take”) available market liquidity before other market participants, and help to determine how to strategically place limit orders to optimize queue priority across various limit order books among exchanges. The ability to optimize queue priority facilitates the ability for a broker to “capture the quoted” spread, i.e., buy on the bid or sell on the offer, while also potentially benefitting from exchange rebates paid to liquidity providers.

The Commission understands that data beyond the NBBO with minimal latency are important inputs to strategies designed to optimize the ability to access market liquidity and minimize execution costs. Further, the Commission understands that competing with the most effective SORs is more difficult without possessing real-time market data while minimizing data latency.[902] The Commission understands that those traders who do not access trading tools that utilize comprehensive market data with low latency experience higher execution costs on average.

4. Request for Comments on Baseline

The Commission requests comments on its baseline analysis. In particular, the Commission solicits comment on the following:

161. Do you agree with the Commission's assessment of the market failures and the need for regulation to solve market data problems? Why or why not? Do additional market failures exist that are not described in this release? If so, what are they? Please explain in detail.Start Printed 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.Start Printed 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.

(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.

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.

(b) Expanding Core Data Content

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

(i) Effects of New Round Lot Definition

The Commission proposes to define a round lot according to a tiered system based on the price of the stock.[909] This definition would result in the inclusion of quotes at better prices in core data that were previously excluded from being reported because they consisted of too few shares. These new quotes would now become visible to anyone who subscribes to core data, thereby improving transparency. The Commission preliminarily believes that the proposed changes to the round lot definition would create an economic benefit for market participants who currently rely exclusively on SIP data to obtain market information, and for market participants who post odd-lot quotes at prices superior to the NBBO. These market participants would benefit from being able to see more information on these smaller quotes at better prices before they send in their orders, which could improve their trading decisions and order execution quality by providing an opportunity to realize gains from trade,[910] as discussed below in this section.[911] The proposed change Start Printed Page 16823could also improve price efficiency. This is because certain odd-lot information not currently disseminated as part of SIP data would be made available as part of proposed core data; therefore market participants who use SIP data who previously did not use the information contained in odd-lots would be able to incorporate this information into their trading decisions. These trading decisions are integral to how market prices are formed. Also, the proposed change could affect order routing and the share of order flow received by each exchange, since more traders will be aware of quotes at better prices that are currently in odd-lots sizes, and these may not be on the same exchange as the one that has the best 100 share quote.

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

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.

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.Start Printed Page 16824

Table 4—Instances of Price Improvement

Round lot tier 1 2Instances of price improvement (%) 3
Best bidBest askBest bid or best ask
1. < = $50n/an/an/a
2. $50.01-$1005.35.09.7
3. $100.01-$50011.511.420.6
4. $500.01-$100046.850.172.8
5. 1000.01+73.570.592.2
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

Round lot tier 1 2Best bid: Average price improvement ($) 3Best ask: Average price improvement ($) 3Average difference in quoted half spread (%) 4SIP: Average quoted percent half spread (%)
1. < = $50n/an/an/an/a
2. $50.01-$1000.090.120.0800.31
3. $100.01-$5000.150.140.0440.14
4. $500.01-$10000.790.890.0800.22
5. 1000.01+1.351.360.0880.17
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]

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]

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 Start Printed Page 16825efficiency with which this information becomes reflected in prices.[919]

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

The Commission preliminarily believes that the use of the previous calendar month's average closing price on the primary listing exchange to determine the round lot tier for a given stock balances certain tradeoffs that should be considered when selecting such a benchmark. The Commission is balancing a more up-to-date stock price estimate against the costs imposed on market participants from having to frequently make updates to systems and practices to account for changes to a stock's round lot tier. A more recent average (e.g., the past week's average closing price) may better reflect the stock's current price level, and thereby lead to the stock being placed in the correct tier more frequently. However, such a recent estimate may be more volatile and thus more prone to causing frequent changes to the stock's status, especially if the stock's price level is close to a round lot tier cutoff point, which could then require more frequent adjustments from market participants, including SROs and competing consolidators, to account for what a stock's round-lot tier is and what the NBBO for that stock would be given its tier.

(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.

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

Also, the Commission preliminarily believes that there may be market participants that would start running these order routing strategies if the data were available to them at core data Start Printed Page 16826prices. These market participants might currently find that the value of attempting such strategies without DOB data is too low to justify them, but that access to additional DOB data through these elements of new core data would enable them to run such strategies effectively. To the extent that such market participants exist, the additional DOB data would be a benefit to them as well.

The revision in trading strategies discussed above could result in changes to the decisions traders make about where to route their orders among the various exchanges. Market participants may find that depth of book information suggests trading opportunities on exchanges to which they would not have otherwise routed their orders. The Commission is uncertain about the magnitude of this effect or which exchanges may gain or lose order flow as a result. The Commission cannot determine how many market participants may choose to change routing strategies as a result of the new depth of book information, nor to what extent the new depth of book information would cause market participants to change where they route their orders. The Commission invites comments on this issue.

Also, the Commission preliminarily believes that the more widespread dissemination of depth of book information could result in more efficient pricing.[926] The Commission preliminarily believes that as more traders take advantage of information contained in the depth of book data, prices would reflect this information more quickly. Therefore, more widespread dissemination of depth of book information has the potential to lead to pricing that better reflects available information. If many current users of SIP data are capable of utilizing the information in the new core depth of book data, this effect may be large, but if only a few choose to make use of the new data or are capable of utilizing it, then this effect would be small. The size of this effect depends on the willingness and ability of current market participants who currently rely solely on SIP data to make use of the information in the new depth of book data, which is unobservable.

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

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

(iii) Effects of Addition of Auction Information

The Commission proposes to add “auction information” as an element of core data. This proposal would result in all auction information currently disseminated by exchanges via proprietary data feeds being made available to subscribers of these elements of core data feeds. The Commission preliminarily believes that the addition of auction information as an element of core data would make this information more readily available to anyone who subscribes to these elements of core data and would have effects that include changes to market participants' trading strategies, gains from trade as a result of new participation in auctions, potential improvements to price discovery in auctions, changes to order routing decisions, and a significant reduction in the value of dedicated proprietary auction feeds.

As discussed above, some auction information is currently available to market participants through specialized feeds for a lower price than full DOB feeds,[930] and also a limited set of auction information is available through the current SIP feeds.[931] This enables access to a limited set of auction information for some market participants, at lower prices than full DOB feeds. To the extent that any market participants find these auction feeds sufficient for their trading needs, the Commission preliminarily believes that the addition of all auction information as an element of core data will have a limited effect on these market participants. To the extent that these market participants make up a large share of the market participants who would be interested in using additional auction information, the Commission preliminarily believes that the effect of adding auction information may be limited.[932] The Commission preliminarily believes that the extent of this limitation is reduced by the fact that not all auction information is available to market participants through such feeds. The Commission does not have data on the number of market participants with proprietary feed subscriptions.

The Commission preliminarily believes that auction information contains insights useful to traders in devising and executing trading strategies.[933] Therefore, the Commission preliminarily believes that adding this information as an element of core data would produce a benefit for those traders who currently do not access such information. To the extent that these traders can exploit this auction information, the addition of this information as an element of core data should enable them to produce better trading strategies and lower execution costs, as well as facilitate best execution. To the extent that the advantages of possessing auction information come from exploiting the Start Printed Page 16827trading decisions of market participants who lack this information, this effect would represent a transfer from those traders who currently have auction information to those traders who would obtain access to it through this rule and are able to exploit it to improve their trading strategies. The Commission preliminarily believes that this auction information could potentially be used across all trading venues, including exchange auctions, continuous exchange trading, and off-exchange venues.

The Commission preliminarily believes that there may be potential gains from trade that would be realized through the addition of auction information as an element of core data. The Commission believes that there may be market participants who would trade in auctions but currently do not trade in auctions because they do not access auction data. To the extent such traders exist, the addition of auction information as an element of core data would give them that data. This trade could benefit both sides of the trade, thus resulting in an economic benefit.

To the extent that market participants who start trading in auctions as a result of gaining access to auction information possess insights beyond what can be inferred from auction information, increasing the number of participants in auctions as described above should improve price discovery in the auction process. The Commission preliminarily believes that those who do not participate in auctions because they do not access auction information are unlikely to possess insights beyond what can be inferred from auction information. This is because any market participant who has such insights would find it worthwhile to purchase auction information and participate in the auction so as to exploit the value of the insights. Therefore, this benefit could be small. The size of this effect depends on the relative number of traders who possess such insights to those who do not who start participating in auctions as a result of this rule and the size of their auction traders in that event, both of which are unobservable in the current market.

The Commission preliminarily believes that the addition of auction information as an element of core data may affect the order routing decisions of market participants who currently do not have access to auction information. For example, some off-exchange trading venues cross market-on-close orders before the closing auction takes place and later settle the trades at the closing auction price. Having access to auction imbalance information may affect market participants' decision to route a closing order to either an off-exchange venue or to the closing auction on the primary listing exchange. For example, a market participant who gets access to auction information through a subscription to these elements of new core data might decide not to route the order to an off-exchange venue so as to be able to participate in the auction using the new information available. This auction information could also affect decisions made during the time when auction information is disseminated about whether to send orders to continuous trading venues instead of auctions or off-exchange venues. However, the Commission preliminarily believes that the overall effect of auction information on order routing decisions is uncertain and likely would vary based on market conditions.

The Commission preliminarily believes that the value of dedicated auction feeds would be substantially reduced as a result of the proposed addition of auction information to core data, and that this would result in a loss of revenue for those exchanges who offer such feeds. Since the full set of all auction information currently available in the market would be included in the definition of core data proposed by this rule, the Commission preliminarily believes that the value of any existing data product that provides only auction data [934] that is not currently in the exclusive SIP feeds would be substantially reduced. The Commission expects that many market participants who are executing a trade, either for themselves or for a client, have, and would continue to have, a subscription to core data. Therefore, when this subscription includes all available auction information, the value of dedicated proprietary auction data feeds could be substantially reduced.

(iv) General Costs To Expanding Consolidated Data

The Commission preliminarily believes that there are three potential costs to adding the new core data elements proposed in this rule, which are common across all these elements. The first potential cost is the cost to the new competing consolidators that would be necessary to implement or upgrade existing infrastructure and software in order to handle the dissemination of the additional core data message traffic. The second cost is the technological investments market participants might have to make in order to receive the new core data message traffic. The third cost is the cost to users of certain kinds of trading strategies that may currently be relying on the fact that this data is not widely distributed today.

The Commission preliminarily believes that the cost for firms that wish to become competing consolidators to implement or upgrade infrastructure to handle the dissemination of new round lot quotes, depth of book information, and auction information would be limited. As discussed in more detail below,[935] the Commission preliminarily believes that the new competing consolidators will likely be firms that already have the technological infrastructure necessary to process full depth of book data and to generate the NBBO using this data. Therefore, for these firms, requiring the competing consolidators to be able to process the new message traffic resulting from the additional core data may add only a minimal cost to becoming a competing consolidator. However, for a firm that does not currently subscribe to, or process data from, exchange proprietary feeds, the new core data message volume would increase the cost of becoming a competing consolidator beyond what it would have cost if the rule did not propose to expand core data. In particular, if the existing exclusive SIPs should decide to enter the competing consolidator business, they may incur such costs as they do not currently disseminate full depth of book data.[936]

The Commission preliminarily believes that there would be limited infrastructure investment required on the part of SROs to provide the information necessary to process and disseminate new core data. This is because the SROs currently provide all elements of new core data over their proprietary feed infrastructure.[937] In addition, the Commission preliminarily believes that many competing consolidators would be firms that already subscribe to these feeds,[938] and Start Printed Page 16828thus, the SROs would likely not have a large amount of new data connections to service and therefore would not need to invest in infrastructure to handle them. However, exchanges, particularly primary markets, may incur some infrastructure costs related to the dissemination of new regulatory data.[939] Currently, the new regulatory data component to the proposed consolidated market data is distributed through the SIPs. In order for this information to be distributed through the new decentralized consolidation model, the rule requires the exchanges to provide a feed to competing consolidators and self-aggregators that contains the regulatory data. The Commission preliminarily believes that the infrastructure and operational processes provide such a feed is currently not completely in place and would require investment on the part of exchanges.[940]

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

The Commission preliminarily believes that adding the depth of book and auction information to core data could impose a cost on traders who rely on strategies that take advantage of the fact that the information in depth of book and auction data is not widely distributed (i.e., those traders who are beneficiaries of existing informational asymmetries). To the extent that some of the value of depth of book and auction information lies in the fact that they currently are not observed by a number of market participants, the Commission preliminarily believes that the dissemination of this data would adversely impact the profitability of such trading strategies. For traders using trading strategies based on depth of book information, the magnitude of the cost caused by the proposed amendments would depend on the extent to which the five aggregated levels of depth proposed in this rule approximate the information contained in the full depth of book information. To the extent that these strategies exploit the lack of information on the part of exclusive SIP-reliant traders, this cost would represent a partial transfer to traders who currently rely solely on SIP data. The Commission is unable to estimate the size of this effect, since it does not have a method for detecting the use of such trading strategies from market data or determining what the profit on such strategies would be if they could be detected. The Commission invites comments on the issue.

Regarding the proposed amendment to change the round lot definition, the Commission preliminarily believes that the proposed amendment may negatively affect certain trading 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 Start Printed Page 16829the 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 Start Printed Page 16830these 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]

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]

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 Start Printed Page 16831Commission preliminarily believes that both the amount by which, and the proportion of time, the protected quote would be wider under the proposed amendments would increase with the price of the stock.[956] The Commission invites comments and analysis in order to estimate to what extent the protected quotes would widen under the proposed amendments.

The Commission preliminarily believes that the change in the round lot and protected quote definition could have an effect on retail order flow internalization businesses. Currently, some wholesalers,[957] by arranging to execute orders on behalf of retail 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.

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.

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.

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

Changes in execution quality could in turn affect competition for order flow between different trading venues, with trading venues that experience an improvement/decline in execution quality attracting/losing order flow. However, the Commission is uncertain of the direction or magnitude of these effects.

The Commission preliminarily believes that market participants who currently rely solely on core data to obtain NBBO feeds would incur some infrastructure investment costs as a result of the proposed amendment to change the definition of a round lot. This is based on the Commission's belief that the proposed amendment would lead to more frequent updates to the NBBO and that this would result in an increase in message traffic for NBBO feeds.[964] The Commission acknowledges that having an NBBO feed is an essential component of the broker-dealer business. The Commission is unable to estimate the associated costs because it does not have access to Start Printed Page 16832information about the infrastructure expenses a broker-dealer incurs to process market data and because of the likelihood that such costs vary substantially according to the existing infrastructure of broker-dealers, but the Commission invites comments on the issue.

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

Trading venues and broker-dealers could also experience implementation costs from having to modify and reprogram their systems, including matching engines and SORs, to account for the changes in the NBBO and protected quotes caused by the proposed amendments. For costs to trading venues as a result of changes to the protected quotations, NBBO, and the new restriction on roll up quotes, the Commission does not have detailed information on the operation of exchange matching engines. However, the Tick Size Pilot required 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.

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.

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.

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 Start Printed Page 16833market participants.[970] Also, to the extent that market participants who currently subscribe to proprietary feeds are able to profit from being the only market participants to observe crossed or locked odd-lots, the proposed change will represent a cost to them.[971] To the extent that the ability to profit from observing crossed or locked odd-lot quotes comes from exploiting those market participants who cannot see the crosses or locks, this change will represent a transfer from those who currently trade on this information to those who acquire the information through new core data and are able to use it effectively.[972] It is also possible that traders avoid sending orders because of the risk of being exploited if they cross or lock the market. To the extent that this happens, and to the extent that the proposed expansion of core data addresses this concern, the increase in trading that would result would represent a benefit to both sides of the trade.[973]

The Commission preliminarily believes that some crossed or locked quotes represent traders who are not aware at the time they post their quote that the quote could be filled by a marketable order elsewhere. To the extent this happens it represents a cost to this trader since the posted order is exposed to the risk that it will be executed with a marketable order at a price inferior to what is available on the market to the trader who posted the order.

Market participants would also experience implementation costs in order to modify their systems to account for locked and crossed NBBOs. The Commission preliminarily believes that to the extent that market participants currently rely on the exclusive SIPs to keep track of whether trading restrictions imposed by Rule 610(d) would apply, their systems would have to be updated to take into account the fact that the NBBO is no longer the price point at which such restrictions are triggered. Instead, they would have to keep track of both the NBBO for trading purposes, and the new protected bid and offer in order to monitor whether a 610(d) restriction would apply. The costs to make such changes are covered by the estimate provided above for costs to implement changes that would result from changes to the NBBO and protected quote, since that estimate is related to trading system adjustments.[974] Such costs are likely to vary substantially across market participants depending on their existing infrastructure.

An increase in the frequency of locked and crossed markets could also have additional economic effects. As discussed above, it could cause a change in order routing behavior and order flow between trading venues. Furthermore, as discussed below, it could also affect the calculation of Rule 605 execution statistics.

(iii) Other Rules and Regulations

The changes to core data, particularly the changes to the definition of “national best bid and national best offer” affect how other rules and regulations operate. In particular, this change affects which orders determine the reference price for numerous rules, including rules under the Exchange Act, SRO rules, and NMS plans. The Commission discussed many of these above in Section III.C.1(d)(i). Specifically, the Commission preliminarily believes that the changes to the NBBO may present changes to the benchmark prices used in Regulation SHO, LULD, retail liquidity programs, market maker obligations, and certain exchange order types and recognizes that the change in the benchmark price could result in economic effects. Further, changing the NBBO would alter the estimation mechanics for Rule 605 metrics, resulting in implementation costs. In addition, the proposed round lot definition would result in economic effects through its impact on the Rule 606 compliance. Finally, the Commission preliminarily believes that the proposed rules, though appearing to change the requirements of several other rules and regulations, would not necessarily have an economic impact through these other rules and regulations.

For Rule 201 of Regulation SHO, the reference bid for the execution of a short sale transaction could be higher under that proposal than it is currently, potentially slightly increasing the burdens on short selling. Currently, after the Short Sale Circuit Breaker triggers, short sales can only execute at prices greater than the NBB. While short sales are currently permitted to execute against any odd-lot quotations that exist above the NBB, the proposed round lot 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 Start Printed Page 16834addition, the economic effects of this potential marginal change depends largely on how often odd-lot quotations lead price declines or lead price increases.

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

In addition, the NBBO midpoint in stocks priced higher than $50 could be different under the proposal than it otherwise would be, resulting in changes in the estimates for Rule 605 statistics calculated using NBBO midpoint, such as effective spreads. In particular, at times when bid odd-lot quotations exist within the current 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.

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

In addition, the Commission preliminarily believes that the proposal may result in some rules appearing to change but such changes might not result in economic effects. For example, the proposed amendments may impact the compliance with Rules 602(a), 602(b), 604(a)(1), 604(a)(2), and Rule 610(c). It is unclear whether these impacts would have economic effects. For example, exchanges may already have procedures to collect and make available their best bids and offers to vendors, regardless of the size of those best bids and offers. Further, 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, Start Printed Page 16835exchanges 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 Start Printed Page 16836operation 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]

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.

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 Start Printed Page 16837barriers to entry would differ across these five types of entities.

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.

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]

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]

c. Fees for Consolidated Market Data

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

Regarding the fees for the proposed consolidated market data content, the Commission recognizes uncertainty in these fees. The fees charged by the effective national market system plan(s) for the data content necessary to create proposed consolidated market data would be proposed by the operating committee(s) of the national market system plan(s) and filed with the Commission.[992] Because such fees depend on future action by the effective national market system plan(s), the Commission cannot be certain of the level of those fees or whether such fees would provide discounts for those end users who wish to receive subsets of Start Printed Page 16838consolidated market data.[993] As discussed further below, while these fees would not be set by competition, they must be fair and reasonable and not unreasonably discriminatory. Assuming that such fees would be reasonably related to costs,[994] the Commission believes the resulting data content fees could be set at a level that could help sustain the competing consolidator business. Further, if the national market system plan(s) choose(s) to offer discounts for subsets of consolidated market data, competing consolidators would have greater opportunity to offer differentiated products to market participants. Likewise, exchanges continuing to offer connectivity at different latencies would further promote product differentiation by competing consolidators. The Commission preliminarily believes that the national market system plan(s) could propose such discounts because at least one exchange has suggested tiered SIP data products.[995]

The fees charged by competing consolidators to market participants would also determine how many competing consolidators could profitably exist. Given the high 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.

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.

(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