SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing to amend

Conformed to Federal Register Version 
SECURITIES AND EXCHANGE COMMISSION 
17 CFR Parts 240 and 242  
[Release No. 34-96495; File No. S7-31-22] 
RIN 3235-AM57 
Order Competition Rule 
AGENCY: Securities and Exchange Commission. 
ACTION: Proposed rule. 
SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing to amend 
the regulation governing the national market system (“NMS”) under the Securities Exchange Act 
of 1934 (“Exchange Act”) to add a new rule designed to promote competition as a means to 
protect the interests of individual investors and to further the objectives of an NMS. The 
proposed rule would prohibit a restricted competition trading center from internally executing 
certain orders of individual investors at a price unless the orders are first exposed to competition 
at that price in a qualified auction operated by an open competition trading center. The proposed 
rule would also include limited exceptions to this general prohibition. In addition, the 
Commission is proposing to amend the regulation governing the NMS to add new defined terms 
included in the proposed rule.  
DATES: Comments should be received on or before March 31, 2023. 
ADDRESSES: Comments may be submitted by any of the following methods: 
Electronic Comments: 
• Use the Commission’s internet comment form 
(https://www.sec.gov/rules/submitcomments.htm); or  

2 
 
• Send an email to [email protected]. Please include File Number S7-31-22 on the 
subject line. 
Paper Comments: 
• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-1090.  
All submissions should refer to File Number S7-31-22. This file number should be 
included on the subject line if email is used. To help the Commission process and review your 
comments more efficiently, please use only one method. The Commission will post all 
comments on the Commission’s 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, on official business days between the hours of 10 a.m. 
and 3 p.m. Operating conditions may limit access to the Commission’s Public Reference Room. 
All comments received will be posted without change. Persons submitting comments are 
cautioned that the Commission does not redact or edit personal identifying information from 
comment submissions. You should submit only information that you wish to make available 
publicly.  
Studies, memoranda, or other substantive items may be added by the Commission or staff 
to the comment file during this rulemaking. A notification of the inclusion in the comment file of 
any materials will be made available on the Commission’s website. To ensure direct electronic 
receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to 
receive notifications by email. 
FOR FURTHER INFORMATION CONTACT: Dan Gray, Senior Special Counsel, Jennifer 
Dodd, Special Counsel, or Stacia Sowerby, Special Counsel, at (202) 551-5500, Office of Market 

3 
 
Supervision, Division of Trading and Markets, Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549. 
SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment 
amendments to Regulation NMS [17 CFR 242.600 through 242.614] (“Regulation NMS”) that 
would add new 17 CFR 242.615 (“Proposed Rule 615”), add new defined terms to 17 CFR 
242.600 (“Rule 600”) that are used in Proposed Rule 615, and make conforming amendments to 
defined terms in 17 CFR 242.602, 17 CFR 242.611, and 17 CFR 242.614; and conforming 
amendments to defined terms in 17 CFR 240.3a51-1, 17 CFR 240.13h-1, 17 CFR 242.105, 17 
CFR 242.201, 17 CFR 242.204, and 17 CFR 242.1000. 
TABLE OF CONTENTS 
I. Introduction .......................................................................................................................5 
II. Overview of Market Structure for NMS Stocks ............................................................. 13 
A. Investors ........................................................................................................................ 13 
B. Trading Centers ............................................................................................................. 15 
C. Order Types and Trading Costs ..................................................................................... 19 
D. Quantitative Measures of Order Execution Quality and Trading Costs .......................... 25 
1. Description of Quantitative Measures ........................................................................ 26 
2. Examples of Calculating Measures of Order Execution Quality and Trading Costs .... 29 
III. Statutory and Regulatory Background....................................................................... 33 
A. Statutory Framework for an NMS .................................................................................. 33 
B. Current Regulatory Components of the NMS for NMS Stocks ........................................ 38 
1. Rules Addressing Consolidated Market Data ............................................................. 40 
2. Rules Addressing Order Handling and Execution....................................................... 54 
3. Rules Addressing Access to Trading Centers ............................................................. 61 
4. Disclosure of Order Routing Practices and Order Execution Statistics........................ 67 
IV. Description of Proposed Rule 615 ............................................................................... 69 
A. Overview of Order Competition Requirement ................................................................ 69 
B. Coverage of Proposed Rule 615 ..................................................................................... 77 
1. Definition of Segmented Order .................................................................................. 77 
2. Definition of Open Competition Trading Center ........................................................ 84 
3. Definition of Restricted Competition Trading Center ................................................. 98 
4. Definition of Originating Broker ................................................................................ 99 
5. Exceptions ............................................................................................................... 101 

4 
 
C. Qualified Auction Requirements .................................................................................. 106 
1. Auction Messages .................................................................................................... 106 
2. Auction Responses .................................................................................................. 111 
3. Pricing Increment .................................................................................................... 112 
4. Fees and Rebates ..................................................................................................... 114 
5. Auction Execution Priority ...................................................................................... 117 
D. Open Competition Trading Center Requirements ......................................................... 122 
E. Originating Broker Requirements ................................................................................ 123 
F. Broker-Dealer Requirements ....................................................................................... 126 
G. National Securities Exchange Requirements ................................................................ 129 
V. Request for Comment.................................................................................................... 131 
VI. Paperwork Reduction Act Analysis .......................................................................... 141 
A. Summary of Collection of Information ......................................................................... 142 
1. Auction Messages .................................................................................................... 142 
2. Identifying and Marking Segmented Orders ............................................................. 143 
3. Originating Broker Certification .............................................................................. 143 
4. NMS Stock ATS Policies and Procedures to Exclude Subscribers ............................ 144 
B. Proposed Use of Information ....................................................................................... 145 
1. Auction Messages .................................................................................................... 145 
2. Identifying and Marking Segmented Orders ............................................................. 146 
3. Originating Broker Certification .............................................................................. 146 
4. NMS Stock ATS Policies and Procedures to Exclude Subscribers ............................ 147 
C. Respondents ................................................................................................................ 148 
1. Auction Messages .................................................................................................... 150 
2. Identifying and Marking Segmented Orders ............................................................. 152 
3. Originating Broker Certification .............................................................................. 155 
4. NMS Stock ATS Policies and Procedures to Exclude Subscribers ............................ 157 
D. Burdens ....................................................................................................................... 157 
1. Auction Messages .................................................................................................... 157 
2. Identifying and Marking Segmented Orders ............................................................. 161 
3. Originating Broker Certification .............................................................................. 170 
4. NMS Stock ATS Policies and Procedures for Excluding Subscribers ....................... 173 
E. Collection of Information is Mandatory ....................................................................... 176 
F. Confidentiality of Information Collected ...................................................................... 176 
1. Auction Messages .................................................................................................... 177 
2. Identifying and Marking Segmented Orders ............................................................. 177 
3. Originating Broker Certification .............................................................................. 177 
4. NMS Stock ATS Policies and Procedures to Exclude Subscribers ............................ 178 
G. Retention Period for Recordkeeping Requirements ...................................................... 178 
H. Request for Comments ................................................................................................. 178 
VII. Economic Analysis ..................................................................................................... 179 
A. Introduction ................................................................................................................. 179 

5 
 
B. Baseline ....................................................................................................................... 186 
1. Competition for Liquidity Provision in NMS Stocks ................................................ 189 
2. Segmentation of Individual Investor Order Flow ...................................................... 195 
3. Institutional Investor Interactions with Retail Orders ............................................... 209 
4. Execution Quality of Individual Investor Marketable Orders in NMS Stocks ........... 210 
5. Variation in Wholesaler Execution Quality .............................................................. 231 
6. Retail Broker Services ............................................................................................. 243 
7. Rules Addressing Consolidated Market Data ........................................................... 248 
C. Economic Effects ......................................................................................................... 253 
1. Benefits ................................................................................................................... 256 
2. Costs........................................................................................................................ 280 
3. Competition ............................................................................................................. 313 
4. Efficiency ................................................................................................................ 328 
5. Capital Formation .................................................................................................... 331 
D. Reasonable Alternatives .............................................................................................. 331 
1. Variation in Provisions regarding Segmentation and Routing ................................... 332 
2. Alternate Definitions of Segmented Orders .............................................................. 343 
3. Variation in Auction Design .................................................................................... 348 
4. Variation in Exceptions to the Order Competition Requirement ............................... 359 
5. Variation in the Definition of Open Competition Trading Centers ............................ 363 
6. Wholesaler Information Barriers .............................................................................. 367 
7. Display Quotes in Retail Liquidity Programs ........................................................... 368 
8. Creation of a Retail Best Bid and Offer .................................................................... 369 
9. Disclosure of Execution Quality of Individual Investor Orders ................................ 371 
E. Request for Comments ................................................................................................. 372 
VIII. Regulatory Flexibility Act Certification ............................................................... 376 
IX. Consideration of Impact on the Economy ................................................................ 381 
Statutory Authority ............................................................................................................... 381 
 
I. Introduction 
The Commission is proposing a new rule, Proposed Rule 615 of Regulation NMS, 
entitled the “Order Competition Rule,” to promote a more competitive, transparent, and efficient 
market structure for NMS stocks, with resulting benefits to investors. Proposed Rule 615 would 
require that certain orders of individual investors be exposed to competition in fair and open 
auctions, before such orders could be executed internally by trading centers that restrict order-by-

6 
 
order competition.
1
 The Commission believes that the proposal would better advance each of the 
five Congressional objectives for an NMS set forth in section 11A of the Exchange Act.
2
 In 
particular, Proposed Rule 615 is designed to benefit individual investors by promoting 
competition and transparency as means to enhance the opportunity for their orders to receive 
more favorable prices than they receive in the current market structure, as well as to benefit 
investors generally by giving them an opportunity to interact directly with a large volume of 
individual investor orders that are mostly inaccessible to them in the current market structure. 
This section provides an overview of that market structure and how that market structure may 
impact investors. 
As discussed in sections II and VII below, individual investors primarily use market 
orders and marketable limit orders (collectively known as “marketable orders”) to trade in NMS 
stocks. Market participants who use these orders seek to trade immediately at the best available 
prices in the market. Broker-dealers route more than 90% of marketable orders of individual 
investors in NMS stocks to a small group of six off-exchange dealers, often referred to as 
“wholesalers.”
3
 The wholesaling business is highly concentrated, with two firms capturing 
                                                
1
  “Order-by-order” competition in this context means an opportunity to compete to trade with individual 
investor orders by offering the most favorable price for each order based on the particular characteristics of 
the order, including the nature of the NMS stock, the size of the order, and market conditions at the time the 
order is submitted. Section II below provides an overview of the current market structure for NMS stocks, 
including descriptions of key terms used in this release that readers may find useful to assess and comment 
on the Commission’s proposal. Among many others, these terms include “individual investors,” “trading 
centers,” and “wholesalers.” 
2
  15 U.S.C. 78k-1 (“section 11A”). These objectives are: (1) economically efficient execution of securities 
transactions; (2) fair competition among brokers and dealers, among exchange markets, and between 
exchange markets and markets other than exchange markets; (3) the availability to brokers, dealers, and 
investors of information with respect to quotations for and transactions in securities; (4) the practicability of 
brokers executing investors’ orders in the best market; and (5) an opportunity, consistent with objectives 1 
and 4, for investors’ orders to be executed without the participation of a dealer. 15 U.S.C. 78k-1(a)(1)(C). 
3
  Table 3, infra, section VII.B.2.a. 

7 
 
approximately 66% of the executed share volume of wholesalers as of the first quarter of 2022.
4
 
The practice of separately identifying and routing the marketable orders of individual investors 
to wholesalers is a form of “segmentation.” The term “segmentation” can refer to any practice by 
which a certain category of orders is identified and treated differently for execution than other 
categories of orders. 
As discussed in the economic analysis in section VII.B.2 below, individual investor 
orders are segmented because they are “low-cost” flow — they impose lower adverse selection 
costs on liquidity providers than the unsegmented order flow routed to national securities 
exchanges. “Adverse selection” involves situations where buyers and sellers have different 
information, and specifically for a liquidity provider, refers to the extent to which prices move 
against it after a trade. For example, if the price of a stock drops right after a liquidity provider 
buys it, the liquidity provider has suffered from adverse selection. Generally, the more severe the 
adverse selection, the larger the “effective spread” that would be expected for a trade because 
liquidity providers require a wider effective spread to compensate them for the higher cost of 
adverse selection.
5
 In this respect, the size of effective spreads can be interpreted as a measure of 
the average adverse selection that liquidity providers expect to suffer when trading with 
incoming orders. Data analysis conducted for this proposal reveals that the average adverse 
                                                
4
  See infra note 372. 
5
  As explained in more detail in section II.D below, the “effective spread” of a trade is measured as double 
the difference between the trade’s execution price and the midpoint of the national best bid and offer at the 
time of order receipt. Adverse selection reflects the “price impact” of a trade, which is measured as the 
difference between the midpoint of the national best bid and offer at the time of the trade and the midpoint 
of the national best bid and offer at a specified time (e.g., one minute or five minutes) after the time of the 
trade. 

8 
 
selection costs of orders routed to wholesalers are far lower than the average adverse selection 
costs of orders routed to national securities exchanges.
6
  
The primary benefit of segmentation for individual investors is that it can provide an 
opportunity for their low-cost orders to be executed at better prices than those generally available 
on national securities exchanges, a practice known as “price improvement.”
7
 As discussed in 
section VII below, wholesalers often provide some price improvement relative to the best 
publicly quoted prices for round lot sizes on national securities exchanges.
8
 
Price improvement, however, is not the same as competitive order execution. Today, the 
primary business model of wholesalers is to trade bilaterally as principal with individual investor 
orders (a form of “internalization”). Typically, the way broker-dealers choose a wholesaler for 
any particular order is not based on the price the wholesaler is willing to provide for that order, 
as wholesalers do not display or otherwise indicate in real-time the prices at which they are 
willing to trade with individual investor orders. Instead, a wholesaler is often chosen by a 
formula that depends on past execution quality of the wholesaler, its relationship with the broker-
dealer, and other factors. In addition, the bilateral nature of the wholesaler business model not 
only restricts contemporaneous competition among wholesalers, it also restricts opportunities for 
other market participants to trade with the low-cost flow. Once a wholesaler receives an 
                                                
6
  Table 7, infra, section VII.B.4 (adverse selection costs, as measured by price impact, of marketable orders 
of individual investors in all NMS stocks are 71% lower at wholesalers (1.26 basis points) than on 
exchanges (4.40 basis points)). 
7
  Section VII.B.4 below discusses an analysis of wholesaler trading data indicating the relationship between 
segmentation, adverse selection costs, and order execution quality. 
8
  Table 5, infra, section VII.B.4 (83.17% of marketable orders routed to wholesalers receive price 
improvement when compared to the best publicly quoted prices for round lot sizes on national securities 
exchanges, and 8.78% of marketable orders routed to national securities exchanges receive such price 
improvement). These better prices are due in large part to the ability of wholesalers to offer sub-penny 
prices that are not permitted on national securities exchanges and other trading centers. The current rules 
that govern sub-penny trading are discussed in section III.B.2.c below. 

9 
 
individual investor’s marketable order, the wholesaler’s execution of the order does not face 
competition at all — the wholesaler typically executes the order internally without providing any 
opportunity for other market participants, including institutional investors, to compete to provide 
more favorable prices for the order.
9
 This lack of order-by-order competition among market 
participants is particularly significant in the market for NMS stocks, which is an order-driven 
market in which a wide range of market participants, including institutional investors, seek to 
provide liquidity on national securities exchanges by posting orders for the approximately 12,000 
NMS stocks. In contrast, the listed options market is a quote-driven market in which professional 
market makers dominate liquidity provision by displaying quotes in the more than 1,000,000 
different options series. In sum, in the current market structure for NMS stocks, individual 
investor orders are not merely segmented; they also are isolated from order-by-order competition 
by a wide range of market participants, which, as discussed below, can affect the prices that 
individual investors receive for their orders. 
Data analysis suggests that opening up individual investor orders to order-by-order 
competition would lead to significantly better prices for those investors. In a fully competitive 
market, competition among liquidity providers would be expected to drive the amount of price 
improvement that an order receives to a level commensurate with its adverse selection cost 
(setting aside other relevant costs). All else equal, the lower an order’s expected adverse 
selection cost, the greater would be the order’s expected price improvement. However, as 
discussed in section VII.C.1.b below, the current isolation of individual investor orders from 
order-by-order competition results in suboptimal price improvement for such orders. The 
                                                
9
  As shown in Table 7, infra, section VII.B.4, wholesalers execute internally (in “principal transactions”) 
90.44% of the dollar volume of executed marketable orders routed to them. As discussed in section 
VII.B.2.b below, wholesalers primarily obtain external executions of the remaining volume of the 
marketable orders in “riskless principal” transactions. 

10 
 
Commission labels this forgone price improvement “competitive shortfall.” Based on an analysis 
of trading data from the wholesalers and national securities exchanges in the first quarter of 
2022, the competitive shortfall is estimated to be approximately 1.08 basis points per dollar 
traded by wholesalers or 1.08 cents for every $100 traded, with an estimated total annual 
competitive shortfall of $1.5 billion.
10
 
In addition to this competitive shortfall, the isolation of individual investor orders at 
wholesalers prevents other investors from having an opportunity to trade with this low-cost flow. 
Institutional investors that currently submit their own marketable orders on national securities 
exchanges and other trading centers potentially could trade at better prices if given an 
opportunity to interact with the marketable orders of individual investors in fair and open 
auctions.
11
 For example, data analysis indicates that undisplayed liquidity often is available at 
trading centers other than wholesalers when a wholesaler executes marketable orders of 
individual investors at prices less favorable for the individual investor than the prices of the 
undisplayed liquidity.
12
 Moreover, if institutional investors that currently pay a full “spread” 
(that is, the difference between the highest price bid and the lowest price offer) to access 
liquidity were able instead to interact in auctions with the marketable orders of individual 
investors that currently are mostly inaccessible to them, these institutional investors could benefit 
from lower spread costs.
13
 
                                                
10
  Table 18 and Table 19, infra, section VII.C.1.b (figures in text are for the CAT rebate base competitive 
shortfall estimates). 
11
  See, e.g., section VII.B.3, infra, discussing institutional investor interactions with retail orders. 
12
  Table 20, infra, section VII.C.1.b. 
13
  See, e.g., Section VII.C.1.c, infra, discussing potential improved execution quality for institutional investor 
orders. 

11 
 
The Commission is proposing Rule 615 to encourage greater competition for individual 
investor order execution. Proposed Rule 615 generally would require that individual investor 
orders be exposed to order-by-order competition in fair and open auctions designed to obtain the 
best prices before such orders could be internalized by wholesalers or any other type of trading 
center that restricts order-by-order competition. As a result, individual investor orders could 
continue to receive the benefits of segmentation (i.e., better prices that reflect the low adverse 
selection costs of those orders), but without the negative effects of those orders being isolated 
from order-by-order competition (i.e., such better prices not fully reflecting the low adverse 
selection costs of those orders; and a substantial percentage of those orders seldom being 
accessible to institutional investors and other market participants). In sum, the auctions required 
by Proposed Rule 615 are intended to enhance competitive forces as a means to protect the 
interests of investors in the NMS. 
In developing the specific elements of Proposed Rule 615, the Commission has been 
guided by this goal of benefiting investors by enhancing competition. The overriding objective of 
these elements of Proposed Rule 615 is to maximize the opportunity for a wide range of market 
participants to participate in auctions on terms that will promote the best possible prices for the 
orders of individual investors. In this respect, the Commission has drawn from its experience 
with the operation of existing auctions for orders in listed options and tailored Proposed Rule 
615 to promote fair and open auctions that reflect the particular nature of the market for NMS 
stocks. As discussed in section IV below, these elements would include the wide dissemination 
of auction messages in consolidated market data, requirements that any fees and rebates be 
capped at a low level ($0.0005 per share for auction prices of $1 or more) and be flat across all 
market participants, and requirements for execution priority of auction responses that give no 

12 
 
advantage to the broker-dealer that routed the marketable order of an individual investor to the 
auction.  
In addition, the Commission has limited the scope of Proposed Rule 615 to contexts in 
which an auction could be most beneficial for individual investors. For example, individual 
investors that trade many times per day tend to use marketable orders that pose higher adverse 
selection risk for liquidity providers; hence, their orders would be outside the scope of the rule.
14
 
In addition, proposed exceptions are provided for orders with a market value of $200,000 or 
more and for orders with execution prices (including prices constrained by non-marketable limit 
prices) that are very favorable for individual investors (i.e., the midpoint of the best displayed 
round lot quotations or better).
15
 These exceptions would not be mandatory, however, which 
means that broker-dealers could choose whether or not to route orders with these characteristics 
to an auction. 
As discussed in section VII.D, the Commission assessed several alternatives to Proposed 
Rule 615, both to the design of the required auctions and to the auction approach itself. The 
Commission preliminarily considers Proposed Rule 615 to be the best approach for investors. As 
described throughout this release, and in more detail in section IV, Proposed Rule 615 is 
designed to maintain the price improvement benefits of the segmentation of individual investor 
orders and to enhance those benefits through the introduction of order-by-order competition with 
a wide range of market participants, including institutional investors, through an auction 
mechanism that is fast, low-cost, transparent, and fair.  
                                                
14
  See infra section IV.B.1; section VII.D.2.c. 
15
  As discussed in section IV.B.1 below, a subset of non-marketable limit orders with prices not as favorable 
for individual investors (i.e., beyond the midpoint of the best displayed round lot quotations) would not 
qualify for the proposed exceptions. 

13 
 
The next two sections of this release are intended to provide background information on 
the current structure and regulation of the market for NMS stocks that will help promote 
understanding of the details of the Commission’s proposal. Section II provides a general 
overview of the current market structure for NMS stocks, and section III provides background on 
the statutory and regulatory framework for NMS stocks. Section IV then describes the proposal 
in detail, and section V consolidates all Commission requests for comment on the proposal. 
II. Overview of Market Structure for NMS Stocks 
This section provides an overview of the market structure for NMS stocks,
16
 particularly 
focusing on the types of market participants, order types, and trading costs that will be referred to 
throughout this release.
17
 An understanding of the current market structure, particularly the 
trading costs of different types of market participants, including liquidity takers and liquidity 
providers, is critically important when assessing the rationale and objectives of Proposed Rule 
615. 
A. Investors 
Section 11A(a)(2) of the Exchange Act
18
 provides that the Commission should have due 
regard for the protection of “investors” when facilitating the establishment of an NMS. As used 
                                                
16
  NMS stocks generally include equity securities other than options that are listed on a national securities 
exchange. Rule 600(b)(55) of Regulation NMS defines “NMS stock” as any NMS security other than an 
option, and Rule 600(b)(54) defines “NMS security” to mean any security or class of securities for which 
transaction reports are collected, processed, and made available pursuant to an effective transaction 
reporting plan, or an effective NMS plan for reporting transactions in listed options. The definition of NMS 
stock does not include securities that are not listed on a national securities exchange, sometimes referred to 
as “over-the-counter” or “OTC” securities.  
17
  A much more extensive discussion of the “market microstructure” of securities markets is provided by 
treatises on the subject. See, e.g., Larry Harris, Trading and Exchanges: Market Microstructure for 
Practitioners (Oxford University Press 2003) (“Harris Treatise”); Joel Hasbrouck, Empirical Market 
Microstructure: The Institutions, Economics, and Econometrics of Securities Trading (Oxford University 
Press 2007) (“Hasbrouck Treatise”). 
18
  15 U.S.C. 78k-1(a)(2). 

14 
 
in this release, the term “individual investor” will refer to natural persons that trade relatively 
infrequently for their own or closely related accounts.
19
 Individual investors generally trade in 
relatively small sizes that can be executed against immediately available liquidity. 
The term “institutional investor” as used in this release refers to investors that trade in 
much larger sizes and much more frequently than individual investors. Many institutional 
investors, such as pension funds and mutual funds, operate on behalf of a large number of 
individuals. Because institutional investors need to trade in large sizes that can exceed 
immediately available liquidity, their large “parent” orders typically will be broken into smaller 
“child” orders. Institutional investors typically are focused primarily on obtaining the best price 
for their large parent orders as a whole.
20
 The child orders will be fed into the market gradually 
so as to minimize the extent to which market prices move away before the full size of a parent 
order is executed, which is known as “slippage.” One means for institutional investors to 
minimize slippage is to limit “information leakage” concerning the unexecuted portions of their 
large parent orders by closely controlling the impact of the execution of their child orders on 
market prices.  
                                                
19
  For a discussion of the specific orders covered by Proposed Rule 615, see Proposed Rule 600(b)(91) 
(defining the term “segmented order”) and section IV.B.1 below (discussing the proposed definition of 
“segmented order”). As discussed in section IV.B, the Commission is proposing to add definitions to Rule 
600(b) of Regulation NMS and adjust the numbering of current definitions accordingly. Throughout this 
release, unless otherwise noted, references to existing Rule 600(b) definitions are to the definitions as they 
are currently numbered. References to proposed new definitions are designated with “Proposed Rule 
600(b)” and reflect the proposed adjusted numbering. 
20
  See, e.g., Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594, 3604-3605 (Jan. 21, 
2010) (“Equity Market Structure Concept Release”) (measuring the transaction costs of institutional 
investors “can be extremely complex” because their “large orders often are broken up into smaller child 
orders and executed in a series of transactions” and “[m]etrics that apply to small order executions may 
miss how well or poorly the large order traded overall.”). 

15 
 
B. Trading Centers 
Trades in NMS stocks are executed at a number of different types of trading centers.
21
 As 
discussed below, trading centers that currently trade NMS stocks can be divided into five 
categories: (1) national securities exchanges operating SRO trading facilities;
22
 (2) alternative 
trading systems (“ATSs”) that trade NMS stocks (“NMS Stock ATSs”); (3) exchange market 
makers; (4) wholesalers; and (5) any other broker-dealer that executes orders internally by 
trading as principal or crossing orders as agent.
23
 
National securities exchanges, among other things, operate SRO trading facilities that 
bring together purchasers and sellers of NMS stocks and execute their trades, fall within the 
definition of an exchange in section 3(a)(1) of the Exchange Act,
24
 and are required to register 
under section 6 of the Exchange Act.
25
 As discussed further in section III.A below, national 
securities exchanges are subject to a comprehensive regulatory regime that, among other things, 
requires that their rules not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act and not be designed to permit unfair 
discrimination between customers, issuers, and broker-dealers. All national securities exchanges 
                                                
21
  Rule 600(b)(95) of Regulation NMS defines “trading center” as a national securities exchange or national 
securities association that operates a self-regulatory organization (“SRO”) trading facility, an alternative 
trading system, an exchange market maker, an OTC market maker, or any other broker or dealer that 
executes orders internally by trading as principal or crossing orders as agent.  
22
  Rule 600(b)(89) of Regulation NMS defines “SRO trading facility” as, among other things, a facility 
operated by a national securities exchange that executes orders in a security. 
23
  “Broker” is generally defined in section 3(a)(4)(A) of the Exchange Act as any person engaged in the 
business of effecting transactions in securities for the account of others. 15 U.S.C. 78c(a)(4)(A). “Dealer,” 
in turn, is generally defined in section 3(a)(5)(A) of the Exchange Act as any person engaged in the 
business of buying and selling securities for such person’s own account through a broker or otherwise. 15 
U.S.C. 78c(a)(5)(A). The term “broker-dealer” is used in this release to encompass all brokers, all dealers, 
and firms that are both brokers and dealers. 
24
  Section 3(a)(1) of the Exchange Act defines “exchange” as, among other things, any organization that 
provides facilities for bringing together purchasers and sellers of securities. 15 U.S.C. 78c(1). 
25
  15 U.S.C. 78f. 

16 
 
publicly display quotations for NMS stocks in consolidated market data and are known as “lit” 
trading centers. As discussed in section III.B.1 below, the best-priced quotations of round lots of 
national securities exchanges (highest priced bids to buy and lowest priced offers to sell) are 
included in the consolidated market data feeds currently disseminated by centralized securities 
information processors (“SIPs”). In the first quarter of 2022, 16 national securities exchanges 
executed 59.7% of share volume in NMS stocks.
26
 
NMS Stock ATSs operate facilities that fall within the definition of an exchange in 
section 3(a)(1) of the Exchange Act, but, as discussed in section III.B.3.b below, they are 
exempted from that definition if they register as broker-dealers and otherwise comply with 
Regulation ATS under the Exchange Act.
27
 No NMS Stock ATS currently displays quotations in 
NMS stocks in consolidated market data. The trading centers that do not display quotations are 
known as “dark” trading centers or “dark pools.” An NMS Stock ATS is required to provide fair 
access to its services if it had 5% or more of the average daily volume with respect to an NMS 
stock during four of the preceding six calendar months,
28
 and as of November 30, 2022, one 
NMS Stock ATS discloses on its Form ATS-N that it is subject to these fair access requirements 
                                                
26
  Table 1, infra, section VII.B.1. 
27
  17 CFR 240.3a1-1(a)(2); see also Securities Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 
70844, 70858 (Dec. 22, 1998) (“Regulation ATS Adopting Release”) (stating that the Commission would 
not consider making an assessment whether a particular system should register as an exchange unless such 
system exceeded the volume thresholds specified in 17 CFR 240.3a1-1(b): during three of preceding four 
calendar quarters, the system had (1) 50% or more of the average daily dollar trading volume in any 
security and 5% or more of the average daily dollar trading volume in any class of security; or (2) 40% or 
more of the average daily dollar trading volume in any class of securities). 
28
  See Rule 301(b)(5); infra section III.B.3.b (discussing fair access requirements for NMS Stock ATSs).  

17 
 
for securities that are available for trading on its platform.
29
 In the first quarter of 2022, 32 ATSs 
executed 10.2% of volume in NMS stocks.
30
 
An exchange market maker is defined in Rule 600(b)(32) of Regulation NMS as any 
member of a national securities exchange that is registered as a specialist or market maker 
pursuant to the rules of such exchange. Exchange rules typically require exchange market makers 
to provide liquidity by displaying quotations at which they are willing to buy and sell NMS 
stocks for their own account.
31
 In this respect, exchange market makers fall within the definition 
of a “dealer” in section 3(a)(5) of the Exchange Act as buying and selling NMS stocks for their 
own accounts as part of a regular business. The on-exchange volume of exchange market makers 
in NMS stocks is included in the volume for national securities exchanges referenced above 
because it is reported by such exchanges. 
Wholesalers fall within the definition of an OTC market maker in Rule 600(b)(64) of 
Regulation NMS — any dealer that holds itself out as being willing to buy from and sell to its 
customers, or others, in the United States, an NMS stock for its own account on a regular or 
continuous basis otherwise than on a national securities exchange in amounts of less than block 
                                                
29
  See Dealerweb Inc., Form ATS-N/OFA, Part III, Items 11 (Trading Services, Facilities and Rules) and Item 
25 (Fair Access) (filed Oct. 24, 2022), 
https://www.sec.gov/Archives/edgar/data/817462/000081746222000015/0000817462-22-000015-
index.htm (disclosing that the NMS Stock ATS is subject to the fair access requirements in symbols SPY 
and QQQ). This NMS Stock ATS generally limits its eligible subscribers to market makers, banks, broker-
dealers, and asset managers with at least $10 under management. See id. at Part III, Item 1 (Types of 
Subscribers) and Item 2 (Eligibility for ATS Services). Access to Form ATS-Ns filed by NMS Stock ATSs 
are available on the Commission’s website at https://www.sec.gov/divisions/marketreg/form-ats-n-
filings.htm. 
30
  Table 1, infra, section VII.B.1.  
31
  See, e.g., New York Stock Exchange LLC (“NYSE”) Rule 104 (Dealing and Responsibilities of DMMs) 
(requiring the exchange’s Designated Market Makers (“DMMs”) to maintain a continuous two-sided quote 
for securities in which the DMM unit is registered with the exchange) available at 
https://nyseguide.srorules.com/rules. 

18 
 
size. The term “wholesaler” is not defined in Regulation NMS, but commonly refers to an OTC 
market maker that seeks to attract orders from broker-dealers that service the accounts of 
individual investors,
32
 referred to in this release as “retail brokers.”
33
 The public order-routing 
reports required by 17 CFR 242.606 (“Rule 606”)
34
 show that the six largest wholesalers 
collectively paid retail brokers $235 million in payment for order flow (“PFOF”) in the first 
quarter of 2022 for orders in NMS stocks.
35
 Many retail brokers do not accept PFOF for 
marketable orders in NMS stocks routed to wholesalers, though the retail brokers that do accept 
PFOF represent 73.88% of the dollar volume of marketable orders of retail brokers routed to 
wholesalers.
36
 
Wholesalers do not display or otherwise reveal the prices at which they are willing to 
execute individual investor orders internally. Moreover, as discussed in section III.B.3 below, 
while they are subject to Commission and SRO requirements as broker-dealers, wholesalers are 
not subject to a statutory or regulatory requirement to provide fair access. They are not required 
to provide an opportunity for other market participants, including institutional investors and 
other exchange market makers, to compete on an order-by-order basis to provide the best prices 
for the individual investor orders that the wholesalers internalize. Some institutional investors, 
                                                
32
  Another type of business operated by some OTC market makers is known as a “single dealer platform,” 
which primarily seeks to attract the orders of institutional investors for internal execution. Infra section 
VII.B.3. 
33
  As discussed in section VII.B.1.a below, the Commission has identified six firms as wholesalers based on 
the public order routing disclosures of retail brokers. Retail broker services are discussed in section VII.B.6 
below. 
34
  Rule 606 is discussed in section III.B.4 below. 
35
  See infra section VII.B.6.a. 
36
  See Table 14, infra section VII.B.5.c. 

19 
 
for example, consider this order flow to be “inaccessible.”
37
 In the first quarter of 2022, six large 
wholesalers internally executed 23.9% of share volume in NMS stocks.
38
 
The fifth and final category of trading center that executes trades in NMS stocks is a 
catchall category encompassing broker-dealers that execute orders internally by trading as 
principal or crossing orders as agent. In the first quarter of 2022, over 230 broker-dealers (other 
than NMS Stock ATSs and OTC market makers) reported trades in NMS stocks, which 
accounted for the remaining 6.3% of share volume in NMS stocks.
39
 
C. Order Types and Trading Costs 
When seeking to buy and sell NMS stocks, investors submit orders through the broker-
dealers that service their accounts. The order type most frequently used to trade by individual 
investors is a “market” order, which simply instructs a broker-dealer to seek an execution of the 
order at the best available price in the market. In contrast to market orders, a “limit order” 
specifies a “limit price” — a price beyond which the investor is not willing to trade. Limit prices 
reflect an intention to “buy low and sell high.” For example, a buy order with a limit price of $20 
means the investor would like to buy as soon as possible, but only at a price that is $20 or less. 
Conversely, a sell order with a limit price of $20 means the investor would like to sell as soon as 
possible, but only at a price that is $20 or more. 
                                                
37
  See, e.g., Cowen, Inc., “Cowen Market Structure: Retail Trading — What’s going on, what may change, 
and what can you do about it?” (Mar. 23, 2021), available at https://www.cowen.com/insights/retail-
trading-whats-going-on-what-may-change-and-what-can-institutional-traders-do-about-it/ (“Market makers 
print most of these shares internally at their firm, so they trade off-exchange. One way we have for 
isolating retail volume is to look at the share of volume that trades off-exchange, but not in a dark pool. We 
refer to this as ‘inaccessible liquidity.’ This is because most institutional orders – whether they are executed 
via algos directly or by high touch desks – primarily go to exchanges and dark pools.”). 
38
  Table 1, infra, section VII.B.1. 
39
  Table 1, infra, section VII.B.1. 

20 
 
In practice, the likelihood and speed of execution of limit orders can vary greatly 
depending primarily on the relation between their limit prices and the best-priced quotations that 
are displayed by national securities exchanges in the consolidated market data feeds. As 
discussed in section III.B.1 below, these quotations are in “round lot” sizes, which currently are 
100 shares or more for nearly all NMS stocks. The highest price bid for an NMS stock is known 
as the national best bid (“NBB”), and the lowest price offer for an NMS stock is known as the 
national best offer (“NBO”). Collectively, the NBB and NBO are known as the national best bid 
and offer (“NBBO”). When a limit order to buy has a limit price that is equal to or greater than 
the NBO, it is known as a “marketable” limit order because it can be executed immediately at the 
best displayed quote to sell. Similarly, a limit order to sell is marketable when it has a limit price 
that is equal to or less than the NBB.
40
 
For example, assume the NBB is $20.00 and the NBO is $20.10. A buy limit order with a 
price of $20.10 or higher is marketable, and a sell limit order with $20.00 or lower is marketable. 
Marketable limit orders are similar to market orders with respect to their willingness to trade 
immediately at the best displayed prices or better and will be referred to collectively in this 
release as “marketable orders.” 
Investors that use marketable orders to trade immediately at the best available prices are 
known as “liquidity takers” and generally incur a trading cost for the service, known as a 
“spread.” In the example above, when the NBBO is $20.00 and $20.10, the quoted spread is 10 
cents. An investor that wished to avoid paying a spread could use a “non-marketable” limit order 
in an attempt to become a “liquidity provider.” A non-marketable limit order to buy has a limit 
                                                
40
  Rule 600(b)(47) of Regulation NMS defines a “marketable limit order” as any buy order with a 
limit price equal to or greater than the NBO at the time of order receipt, or any sell order with a 
limit price equal to or less than the NBB at the time of order receipt. 

21 
 
price that is less than the NBO, and a non-marketable limit order to sell has a limit price that is 
greater than the NBB.
41
 For example, again using the example when the NBBO is $20.00 and 
$20.10, an investor could submit a buy limit order with a limit price of $20.00. This buy order is 
not marketable because it is priced less than the NBO of $20.10 and therefore cannot be executed 
immediately against the best displayed offer. A non-marketable limit order generally will “rest” 
on the continuous order book of a trading center awaiting the arrival of a contra-side marketable 
order against which it can execute. In the example, if the resting non-marketable limit order to 
buy were able to obtain an execution at its limit price of $20.00 (e.g., by interacting with a 
contra-side marketable order to sell), the investor would have succeeded in trading at a price that 
was 10 cents lower than if the investor had used a marketable order and traded at the NBO of 
$20.10. The risk, however, of using a non-marketable limit order is that it may not execute at all 
if market prices move away from the order (i.e., prices increase for buy orders and decrease for 
sell orders). If this happens, the investor will incur an opportunity cost by missing a trade. 
Using the example of an NBBO of $20.00 and $20.10, assume the investor submitted a 
non-marketable order to buy with a limit price of $20.00, but did not obtain an execution and the 
NBBO then rose to $20.15 and $20.25. Seeing that the market was moving away, the investor 
decided to cancel the unexecuted non-marketable order and replace it with a marketable order to 
buy, which then was executed at the new NBO price of $20.25. In this case, the investor incurred 
an opportunity cost of 15 cents — the difference between (1) the original NBO price of $20.10 
that the investor likely could have obtained if the investor first had used a marketable order to 
                                                
41
  Rule 600(b)(57) of Regulation NMS defines “non-marketable limit order” as any limit order other than a 
marketable limit order. 

22 
 
buy at $20.10 rather than using the non-marketable order in an unsuccessful attempt to buy at 
$20.00, and (2) the price of $20.25 at which the investor actually obtained an execution. 
In sum, an investor’s decision of whether to use marketable orders or non-marketable 
orders to trade can depend on an often complex judgment of whether prices are likely to move in 
the short-term future. Individual investors, who typically do not follow market prices closely 
throughout a trading day, often will not feel in the best position to make this judgment and 
generally choose to be liquidity takers by using marketable orders to obtain the certainty of an 
immediate execution at a displayed price or better.
42
 Accordingly, a key source of trading costs 
for individual investors are the spreads they pay when using marketable orders. The narrower the 
spreads, the lower the prices at which they will buy and the higher the prices at which they will 
sell, which translate into lower trading costs and higher investment returns. Conversely, wider 
spreads mean higher trading costs and lower investment returns. 
The spread costs of individual investors highlight the role played by liquidity providers in 
determining spreads. Liquidity providers determine spreads by setting the prices at which they 
are willing to trade with marketable orders as such orders are submitted by liquidity takers. 
Liquidity providers can include professional market intermediaries, such as exchange market 
makers and OTC market makers (including wholesalers), as well as investors that use non-
marketable limit orders. For example, national securities exchanges, which display the quotations 
that determine the NBBO, all operate continuous order books. Unexecuted non-marketable 
                                                
42
  Rule 606 order-routing reports reveal that customers of retail brokers used marketable orders for 
approximately 39-40% of their trades and used “other” orders for approximately 26-27% of their trades. 
Table 3, infra, section VII.B.2.a. As presented in Table 2 in section VII.B.2.a below, however, the PFOF 
rates received from wholesalers for these “other” orders almost exactly matched the rates received from 
wholesalers for marketable limit orders. Accordingly, it is likely that most of these other orders were 
marketable (i.e., immediately executable at the best available prices), although the orders may have had 
particular characteristics that led them to be classified as other orders. 

23 
 
orders that have been routed to an exchange rest on its continuous order book awaiting an 
opportunity for interaction with incoming contra-side orders. Using the NBBO example of 
$20.00 and $20.10, assume a national securities exchange has displayed limit orders resting on 
its continuous order book with limit prices that equal the NBBO, but then an institutional 
investor submits a buy order with a limit price of $20.02 for display on the continuous order 
book. At this point, there will be a new NBB of $20.02 and the NBBO spread will have been 
reduced from 10 cents to 8 cents. If an individual investor’s market order to sell was routed to 
the exchange, the order would execute at the new NBB of $20.02, saving the individual investor 
two cents per share compared to the old NBB of $20.00. 
For liquidity providers, the adverse selection costs of trading with a given marketable 
order flow are a key factor for determining the prices at which they are willing to trade with such 
flow, particularly for professional market intermediaries. These market intermediaries generally 
seek to generate short-term trading profits by buying and selling on a continuous basis and 
capturing a spread between their buys and sells. Adverse selection costs reflect the extent to 
which prices move against the liquidity provider in the seconds and minutes after a trade, which 
increases the difficulty faced by the liquidity provider in successfully capturing a spread between 
buys and sells. 
For example, assume an NBBO of $20.00 and $20.10, and a market maker provides 
liquidity by trading with a contra-side marketable sell order at the $20.00 NBB. The market 
maker may hope to profit by quickly providing liquidity to a contra-side marketable buy order at 
the $20.10 NBO and thereby earning a 10 cent spread. Seconds later, however, and before the 
market maker is able to liquidate the buy position, the NBBO declines to $19.85 and $19.95. In 
this case, the market maker has bought immediately prior to a 15 cent decline in the NBBO. This 

24 
 
subsequent move in the NBBO is known as “price impact.” Instead of earning a 10 cent spread 
as it hoped by providing liquidity when the NBBO was $20.00 and $20.10, the market maker 
would realize a loss of 5 cents on its position if it then provided liquidity to a contra-side 
marketable buy order by selling at the new NBO of $19.95. Therefore, the market maker had an 
adverse selection cost of 15 cents. Accordingly, market makers assess the potential adverse 
selection costs of the liquidity-taking order flow with which they are likely to interact when 
setting the spreads at which they are willing to provide liquidity to such flow. Segmentation of 
marketable orders with low adverse selection costs is a means for liquidity providers to control 
such costs. As discussed in section VII,
43
 the marketable orders of individual investors routed to 
wholesalers have adverse selection costs (as measured by price impact) that are approximately 
71% lower than the adverse selection costs of orders routed to national securities exchanges. The 
low adverse selection costs of the segmented marketable orders of individual investors generally 
enable wholesalers to offer better prices for such orders than would be available for unsegmented 
orders routed to national securities exchanges. 
The trading examples thus far have assumed that trades occur at the NBBO prices, which 
are determined by round lot quotations displayed on national securities exchanges. In fact, 
however, trades can be executed on national securities exchanges at prices that are better than 
NBBO prices (“NBBO price improvement”). Marketable orders routed to access the NBBO at a 
national securities exchange can obtain NBBO price improvement in two primary contexts. First, 
a national securities exchange may have displayed orders on its continuous order book with sizes 
less than round lots, known as “odd lot quotations,” that are priced better than the NBBO. If a 
contra-side marketable order is routed to a national securities exchange with such an odd lot 
                                                
43
  See Table 7, infra, section VII.B.4. 

25 
 
quotation, the contra-side marketable order will interact with the odd-lot quotation and receive a 
better price than the NBBO. Second, there may be undisplayed non-marketable limit orders 
resting on the continuous order book of a national securities exchange with prices that are better 
than such exchange’s displayed quotations. One common example is an NBBO midpoint order. 
An NBBO midpoint order has an execution price that is pegged to, and accordingly fluctuates 
with, the midpoint of the NBBO. If the NBBO is $20.00 and $20.10, and an NBBO midpoint 
order to sell is resting on the continuous order book of a national securities exchange, a 
marketable order to buy that is routed to such exchange will execute at the NBBO midpoint price 
of $20.05 rather than the NBO of $20.10. By trading at the NBBO midpoint, the incoming 
marketable buy order has obtained an immediate execution without paying any spread, and the 
resting NBBO midpoint order to sell has not earned any spread. Institutional investors may use 
undisplayed NBBO midpoint orders because they provide an opportunity to trade with contra-
sided marketable flow, but without the information leakage (and potential slippage) that could 
occur if their orders were displayed. 
D. Quantitative Measures of Order Execution Quality and Trading Costs 
A variety of quantitative measures can be used to assess the quality of order executions 
that broker-dealers obtain for their individual investor customers, as well as more generally the 
trading costs of liquidity takers and liquidity providers. 17 CFR 242.605 (“Rule 605”) of 
Regulation NMS,
44
 for example, requires many trading centers, including national securities 
exchanges and wholesalers, to make data files publicly available on a monthly basis that include 
detailed measures of execution quality for marketable and non-marketable orders in NMS stocks. 
This section will describe some of the quantitative measures included in Rule 605 data, as well 
                                                
44
  Rule 605 is discussed in section III.B.4 below. 

26 
 
as provide concrete examples illustrating specifically how the measures are calculated. These 
quantitative measures are referenced extensively throughout this release to explain the rationale 
for and the potential economic effects of Proposed Rule 615. 
 
The following is a list, with brief descriptions, of quantitative measures of order 
execution quality and trading costs in NMS stocks that are included in, or can be derived from, 
Rule 605 data files. Specific examples of how the measures are calculated will be provided in 
section II.D.2 below. 
As stated above, NBBO price improvement is the amount by which the execution price of 
a marketable order is better than the relevant NBBO quotation at the time a marketable order is 
received by a trading center.
45
 For marketable buy orders, it is the amount by which the buy 
order received a price lower than the NBO at the time of order receipt. For marketable sell 
orders, it is the amount by which the sell order received a price higher than the NBB at the time 
of order receipt. 
“NBBO quoted half-spread” is one-half of the difference between the NBO and NBB, as 
measured at the time when a marketable order is received by a trading center. The full quoted 
spread is halved to reflect the spread cost for establishing or liquidating a position (long or 
short). For example, if an investor uses a marketable order to buy at the NBO (incurring a half-
spread to establish a long position), but then is able to use a non-marketable order to sell at the 
NBO (earning a half-spread to liquidate the long position), the investor would have paid a net 
spread of 0 cents on the “round-trip” transaction.  
                                                
45
  Rule 600(b)(36) of Regulation NMS defines “executed with price improvement” as, for buy orders, 
execution at a price lower than the NBO at the time of order receipt and, for sell orders, execution at a price 
higher than the NBB at the time of order receipt. 

27 
 
“Effective half-spread” is the half-spread actually paid by a marketable order. It is 
calculated by comparing execution prices with the NBBO midpoint, rather than the relevant 
NBB or NBO, at the time of order receipt.
46
 Accordingly, a trading center’s average effective 
half-spread for marketable orders may be narrower or wider than the NBBO quoted half-spread, 
depending on the extent to which execution prices at a trading center are inside, at, or outside 
NBBO prices. 
“Price impact” is the extent to which the NBBO midpoint moves against the liquidity 
provider for a marketable order in a short time period after the order execution. For Rule 605 
reporting, the time period is five minutes after the time of order execution. For the analyses of 
CAT data provided in section VII.B.4 below, the time period is one minute after the time of 
order execution.
47
 Price impact measures the extent of adverse selection costs faced by a 
liquidity provider and is closely related to realized half-spread (described next). When price 
impact and realized half-spread are calculated using the same post-trade time period, the 
difference between the effective half-spread and the realized half-spread on a trade will equal the 
price impact of the trade.
48
 
                                                
46
  Rule 600(b)(8) of Regulation NMS defines “average effective spread” as the share-weighted average of 
effective spreads for order executions calculated, for buy orders, as double the amount of difference 
between the execution price and the midpoint of the NBB and NBO at the time of order receipt and, for sell 
orders, as double the amount of difference between the midpoint of the NBB and NBO at the time of order 
receipt and the execution price. 
47
  The analysis in section VII.B.4 below uses one minute to reflect the increase in trading speed in the years 
since Rule 605 was adopted. 
48
  See, e.g., Hasbrouck Treatise at 147 (“The execution cost based on the pretrade bid-ask midpoint (BAM) is 
also known as the effective cost. Since 2001, the U.S. SEC has required U.S. equity markets to compute 
effective costs and make summary statistics available on the Web. . . . The rule . . . also requires 
computation of the realized cost. . . . The difference between effective and realized costs is sometimes used 
as an estimate of the price impact of the trade. The realized cost can also be interpreted as the revenue of 
the dealer who sold to the customer . . . and then covered his position at the subsequent BAM.”).  

28 
 
“Realized half-spread” is calculated similarly to the effective half-spread, but, instead of 
using the NBBO midpoint at the time of order receipt, the realized spread calculation uses the 
NBBO midpoint a short time period after the execution of a marketable order.
49
 For Rule 605 
reporting, the time period is five minutes after the time of order execution. For the analyses of 
CAT data provided in section VII.B.4 below, the time period is one minute after the time of 
order execution.
50
 When deciding to include realized spread statistics in Rule 605 reports, the 
Commission stated that the smaller the average realized spread, “the more market prices have 
moved adversely to the market center’s liquidity providers after the order was executed,” which 
shrinks the spread “realized” by the liquidity providers.
51
 The Commission further stated that the 
average realized spread statistic for market and marketable limit orders potentially could help “to 
spur more vigorous competition to provide the best prices to these orders to the benefit of many 
retail investors.”
52
 In sum, by capturing the extent of adverse selection costs faced by liquidity 
providers, realized spreads are designed to provide a more accurate measure of the potential 
profitability of trading for liquidity providers than do effective spreads.
53
 
                                                
49
  Rule 600(b)(9) of Regulation NMS generally defines “average realized spread” as the share-weighted 
average of realized spreads for order executions calculated, for buy orders, as double the amount of 
difference between the execution price and the midpoint of the NBB and NBO five minutes after the time 
of order execution and, for sell orders, as double the amount of difference between the midpoint of the 
NBB and NBO five minutes after the time of order execution and the execution price. 
50
  The analysis in section VII.B.4 below uses a one-minute period to reflect the increase in trading speed in 
the years since Rule 605 was adopted.  
51
  Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75424 (Dec. 1, 2000). 
52
  Id. 
53
  See, e.g., Harris Treatise at 286 (“Informed traders buy when they think that prices will rise and sell 
otherwise. If they are correct, they profit, and whoever is on the other side of their trade loses. When 
dealers trade with informed traders, prices tend to fall after the dealer buys and rise after the dealer sells. 
These price changes make it difficult for dealers to complete profitable round-trip trades. When dealers 
trade with informed traders, their realized spreads are often small or negative. Dealers therefore must be 
very careful when trading with traders they suspect are well informed.”). 

29 
 
 
When the execution quality and trading cost measures described above are calculated and 
averaged for a large volume of orders at different trading centers, the results can reveal important 
information about the nature of the order execution quality and trading costs across different 
trading centers. Section VII below, which provides an economic analysis of Proposed Rule 615, 
makes extensive use of data analyses using these measures.  
The following two examples are patterned on those analyses, particularly the empirical 
finding that the marketable orders of individual investors routed to wholesalers have adverse 
selection costs (as measured by price impact) that, on average, are approximately 71% lower 
than the marketable orders routed to national securities exchanges. The examples are intended to 
illustrate how quantitative measures of order execution quality and trading costs are calculated in 
these two contexts that are most relevant for understanding the empirical basis for Proposed Rule 
615. The examples show how a difference in the adverse selection costs of order flow routed to 
two different trading centers can result in more price improvement and narrower effective 
spreads at the trading center with lower adverse selection costs (the wholesaler) than at the 
trading center with higher adverse selection costs (the exchange), yet still result in wider realized 
spreads (i.e., spreads realized by the liquidity provider after estimating for adverse selection 
costs) at the wholesaler than at the exchange. 
The first example below (“Exchange Example”) presents the execution of an 
unsegmented marketable order to buy at a national securities exchange at a price that matches the 
NBBO, and the second example below (“Wholesaler Example”) presents the execution of a 
segmented marketable order to buy of an individual investor at a wholesaler at a price better than 
the NBBO. The examples use the calculation methodology prescribed by Rule 605 of Regulation 

30 
 
NMS, except that statistics are presented for the half-spread associated with a single buy or sell 
order rather than the full spread statistics prescribed for Rule 605, which are doubled to reflect 
estimates of round-trip (offsetting buy and sell) trading costs.
54
 Half-spreads are used to more 
clearly present the calculations for the single order in each of the examples. 
The data used for the two examples are labeled as follows: execution price of marketable 
order (“ExP”), NBB at time of order receipt (“NBB
t0
”), NBO at time of order receipt (“NBO
t0
”), 
NBBO midpoint at time of order receipt (“MP
t0
”), and NBBO midpoint 5 minutes after time of 
order execution (“MP
t5
”).  
  
                                                
54
  The definitions of “average effective spread” and “average realized spread” provided in Rule 600(b)(8) and 
(9) of Regulation NMS, which are incorporated in Rule 605, prescribe doubling of the amounts by which 
an order execution price differs from the NBBO midpoint at the time of order receipt (for effective spreads) 
and five minutes after the time of order execution (for realized spreads). 

31 
 
The execution quality and trading cost measures for the two examples of marketable 
orders to buy are calculated as follows: 
NBBO quoted half-spread:  ½ x (NBO
t0
 – NBB
t0
) 
NBBO price improvement: 
NBO
t0
 – ExP 
Effective half-spread: 
ExP – MP
t0
 
Price impact: 
MP
t5
 – MP
t0
 
Realized half-spread: 
ExP – MP
t5
 
 
The data and calculations for the two examples are as follows: 
 EXCHANGE 
EXAMPLE 
WHOLESALER 
EXAMPLE 
EXP 
$110.05 $110.04 
NBB
T0
 
$110.00 $110.00 
NBO
T0
 
$110.05 $110.05 
MP
T0
 
$110.025 $110.025 
MP
T5
 
$110.055 $110.035 
NBBO PRICE 
IMPROVEMENT: 
 
0 cents 
 
1 cent 
NBBO QUOTED HALF-
SPREAD:  
 
2.5 cents 
 
2.5 cents 
EFFECTIVE HALF-SPREAD: 
2.5 cents 1.5 cents 
PRICE IMPACT: 
3 cents 1 cent 
REALIZED HALF-SPREAD: 
<0.5 cents> 0.5 cents 
 
 In the Exchange Example and Wholesaler Example, the NBBO is the same at the time of 
order receipt for both marketable buy orders, but the national securities exchange in the 
Exchange Example executes the order at the NBO with no NBBO price improvement, while the 
wholesaler in the Wholesaler Example executes the marketable buy order with NBBO price 
improvement of one cent. Consequently, the NBBO quoted half-spread is the same for both 
trades (2.5 cents), but the effective half-spread is wider for the liquidity provider on the national 
securities exchange (2.5 cents) than for the wholesaler (1.5 cents) because of the 1 cent NBBO 
price improvement provided by the wholesaler. The price impact of the order routed to the 
national securities exchange is 3 cents, while the price impact of the order routed to the 

32 
 
wholesaler is only 1 cent. Accordingly, the adverse selection cost for the liquidity provider on 
the national securities exchange was 3 cents, while the adverse selection cost for the wholesaler 
was 1 cent. 
The difference in adverse selection costs leaves the liquidity provider on the national 
securities exchange in the Exchange Example with a narrower realized half-spread of negative 
0.5 cents, while the wholesaler in the Wholesaler Example preserves a positive realized half-
spread of 0.5 cents. Stated another way, the wholesaler provided some NBBO price improvement 
(1 cent), but its adverse selection cost savings compared to the liquidity provider on the national 
securities exchange was 2 cents, and as a result the wholesaler was able to capture a realized 
half-spread that was one cent wider than the liquidity provider on the national securities 
exchange. If, however, the wholesaler had provided NBBO price improvement that matched its 
cost savings, the individual investor would have received NBBO price improvement of 2 cents 
rather than 1 cent. In this case, the realized half-spread for both the wholesaler and the liquidity 
provider on the national securities exchange would have been the same — negative 0.5 cents. 
 In this respect, the Exchange Example and Wholesaler Example highlight the key order-
by-order competition objective of Proposed Rule 615. As discussed in section VII.C.2.b below, 
competition among a wide range of liquidity providers on national securities exchanges is 
intense and results in realized spreads for unsegmented orders that are narrower than the realized 
spreads captured by wholesalers for the segmented orders of individual investors. Another way 
of stating the same point is that wholesalers do not provide average NBBO price improvement 
that matches their savings in average adverse selection costs from securing the opportunity to 
trade first with the segmented orders of individual investors. Proposed Rule 615 would enable 
order-by-order competition to provide the best prices to the segmented marketable orders of 

33 
 
individual investors. By providing an opportunity for a wide variety of liquidity providers to 
compete to provide the best prices for the segmented marketable orders of individual investors, 
Proposed Rule 615 is designed to expand the level of NBBO price improvement currently 
provided by wholesalers to match the low adverse selection costs of such orders.  
III. Statutory and Regulatory Background 
The development of today’s market structure for NMS stocks has been guided by the 
Congressional determination set forth in section 11A of the Exchange Act that the United States 
should have an NMS in which multiple competing markets are linked together through 
communications and data processing facilities. This section III first will discuss the Exchange 
Act framework for an NMS. It then will summarize the rules that the Commission has adopted 
over the years to facilitate the development of an NMS, with particular focus on rules that 
address the handling and execution of investor orders in NMS stocks. Many aspects of Proposed 
Rule 615, as described in section IV below, are designed to build on the existing statutory 
framework and Commission rules discussed in this section III. 
A. Statutory Framework for an NMS 
Section 11A of the Exchange Act, enacted as part of the Securities Acts Amendments of 
1975,
55
 sets forth the statutory framework for an NMS. Section 11A(a)(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 an NMS for securities in accordance with the Congressional findings and 
objectives set forth in section 11A(a)(1) of the Exchange Act.
56
 Section 11A(a)(1)(C) sets forth 
                                                
55
  Pub. L. 94-29, 89 Stat. 97 (1975). 
56
  Section 11A(a)(3)(B) also provides the Commission the authority to require the SROs, by rule or order, “to 
act jointly . . . in planning, developing, operating, or regulating [an NMS] (or a subsystem thereof).” 

34 
 
the finding of Congress that it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure five objectives: 
(1) economically efficient execution of securities transactions; 
(2) fair competition among brokers and dealers, among exchange markets, and between 
exchange markets and markets other than exchange markets; 
(3) the availability to brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities; 
(4) the practicability of brokers executing investors’ orders in the best market; and 
(5) an opportunity, consistent with the foregoing objectives of efficient execution of 
securities transactions and practicability of brokers executing investors’ orders in the best 
market, for investors’ orders to be executed without the participation of a dealer.
57
 
A variety of Exchange Act provisions grant the Commission specific rulemaking 
authority in different contexts to fulfill its responsibility to facilitate the establishment of an 
NMS that assures the five objectives. Three of these Exchange Act authorizations are particularly 
relevant in the context of rules to address the handling and execution of investor orders in NMS 
stocks.  
First, section 11A(c)(1)(E) addresses the routing of orders by broker-dealers. It 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 Exchange Act to assure that all 
exchange members and brokers-dealers transmit and direct orders for the purchase or sale of 
NMS stocks in a manner consistent with the establishment and operation of an NMS.
58
  
                                                
57
  Section 11A(a)(1) of the Exchange Act.  
58
  15 U.S.C. 78k-1(c)(1)(E). 

35 
 
Second, section 11A(c)(1)(F) grants rulemaking authority to assure equal regulation of all 
markets for NMS stocks, as well as of all exchange members and broker-dealers effecting 
transactions in NMS stocks.
59
 The meaning of the term “equal regulation” is specified in section 
3(b)(36), which provides that a class of persons or markets is subject to equal regulation if no 
member of the class has a competitive advantage over any other member thereof resulting from a 
disparity in their regulation under the Exchange Act which the Commission determines is unfair 
and not necessary or appropriate in furtherance of the purposes of the Exchange Act. 
Third, section 15(c)(5) addresses the practices of dealers, such as wholesalers. It 
authorizes the Commission to prescribe rules setting forth specified and appropriate standards 
with respect to dealing for dealers (other than specialists registered on a national securities 
exchange) acting in the capacity of a market maker or otherwise that are necessary or appropriate 
in the public interest and for the protection of investors, to maintain fair and orderly markets, or 
to remove impediments to and perfect the mechanism of an NMS.
60
 
In addition to these grants of rulemaking authority to facilitate the development of an 
NMS, section 6 of the Exchange Act
61
 specifically addresses the types of access to trading 
services that one type of market — a national securities exchange — is required to provide to 
broker-dealers and market participants. Access to the trading services of a market is essential for 
that market to be linked together with other markets in an NMS. 
First, section 6(b)(2) requires that, subject to the provisions of section 6(c) relating to 
statutory disqualification and other concerns, the rules of the exchange must provide that any 
                                                
59
  15 U.S.C. 78k-1(c)(1)(F). 
60
  15 U.S.C. 78o(c)(5). 
61
  15 U.S.C. 78f. 

36 
 
registered broker-dealer may become a member of such exchange.
62
 Broker-dealers generally 
need to become exchange members, as an initial matter, to obtain access to many of the trading 
services of an exchange. 
Second, section 6(b)(4) requires that the rules of the exchange provide for the equitable 
allocation of reasonable dues, fees, and other charges among its members and issuers and other 
persons using its facilities.
63
 This provision recognizes that the opportunity for different market 
participants to access trading services at a market can be greatly affected by the charges for those 
services. 
Third, section 6(b)(5) requires that the rules of the exchange are designed to, among other 
things, “remove impediments to and perfect the mechanism of a free and open market and [an 
NMS], and, in general, to protect investors and the public interest.”
64
 Section 6(b)(5) further 
requires that the rules of the exchange are not designed “to permit unfair discrimination between 
customers, issuers, brokers, or dealers.”
65
 These provisions broadly help ensure fair and efficient 
access to the trading services of national securities exchanges, both by requiring them to act 
affirmatively to promote high quality markets and by prohibiting them from acting negatively by 
unfairly discriminating between customers, issuers, or broker-dealers. 
Finally, section 6(b)(8) requires that “the rules of the exchange do not impose any burden 
on competition not necessary or appropriate in furtherance of the purposes” of the Exchange 
                                                
62
  15 U.S.C. 78f(b)(2). 
63
  15 U.S.C. 78f(b)(4). 
64
  15 U.S.C. 78f(b)(5). 
65
  Id.  

37 
 
Act.
66
 This provision further restricts a national securities exchange’s ability to limit access to its 
trading services in an anti-competitive manner.  
To help ensure that national securities exchanges operate according to rules consistent 
with their statutory obligations, section 19(b)(1) of the Exchange Act
67
 requires SROs,
68
 
including national securities exchanges, to file with the Commission any proposed rule change.
69
 
The Commission publishes for public comment all SRO proposed rule changes.
70
 For new or 
materially modified trading services, a proposed rule change generally cannot become effective, 
and the national securities exchange cannot implement such rule change, until the Commission 
has approved it as consistent with the requirements of the Exchange Act.
71
 
Section 15A of the Exchange Act
72
 includes many requirements for the rules of a national 
securities association that are analogous to those prescribed for national securities exchanges. 
FINRA is currently the only registered national securities association. Broker-dealers that handle 
                                                
66
  15 U.S.C. 78f(b)(8). 
67
  15 U.S.C. 78s(b)(1). 
68
  See 15 U.S.C. 78c(b)(26) (defining “self-regulatory organization” to include, among other things, any 
national securities exchange or registered securities association).  
69
  Section 19(b)(1) of the Exchange Act defines a “proposed rule change” to be any proposed change in, 
addition to, or deletion from the rules of an SRO. 15 U.S.C. 78s(b)(1). Section 3(a)(27) of the Exchange 
Act generally defines “rules” to include the constitution, articles of incorporation, bylaws, and rules, or 
instruments corresponding to the foregoing and the stated policies, practices, and interpretations of an 
exchange, association, or clearing agency as the Commission, by rule, may determine to be necessary or 
appropriate in the public interest or for the protection of investors to be deemed to be rules of such 
exchange, association, or clearing agency. 15 U.S.C. 78c(a)(27). Rule 19b-4(b) under the Exchange Act 
defines “stated policy, practice, or interpretation” to mean, in part, any material aspect of the operation of 
the facilities of the SRO or any statement made generally available that establishes or changes any 
standard, limit, or guideline with respect to the rights, obligations, or privileges of persons or the meaning, 
administration, or enforcement of an existing rule. 17 CFR 240.19b-4(b).  
70
  See 15 U.S.C. 78s(b)(1). 
71
  If the Commission does not approve or disapprove a proposed rule change within the required timeframe 
prescribed by section 19 of the Exchange Act, it is “deemed to have been approved.” 15 U.S.C. 
78s(b)(2)(D).  
72
  15 U.S.C. 78o-3. 

38 
 
customer orders in NMS stocks or trade NMS stocks in the off-exchange market generally must 
become FINRA members.
73
 Section 15A does not, however, impose fair access requirements on 
the broker-dealer members of FINRA. Accordingly, broker-dealers that trade internally are not 
subject to the statutory access requirements that apply to national securities exchanges under 
section 6 of the Exchange Act. 
B. Current Regulatory Components of the NMS for NMS Stocks 
Over the years since 1975, the Commission has used its Exchange Act authority to adopt 
a series of rules to fulfill its regulatory responsibility to facilitate the establishment of an NMS. 
In doing so, it particularly has emphasized the importance of promoting competition as a means 
to protect investors and to achieve the five statutory objectives for an NMS. In its request for 
comment on issues relating to market fragmentation in 2000,
74
 for example, the Commission 
stated that the section 11A findings and objectives can be summed up in two fundamental 
principles. First, the interests of investors (both large and small) are preeminent, “especially the 
efficient execution of their securities transactions at prices established by vigorous 
competition.”
75
 Second, investor interests are best served by a market structure that, to the 
greatest extent possible, maintains the benefits of “both an opportunity for interaction of all 
buying and selling interest” in individual securities and “fair competition among all types of 
market centers” seeking to provide a forum for the execution of securities transactions.
76
 The 
                                                
73
  See 15 U.S.C. 78o(b)(8). The Commission has proposed to amend 17 CFR 240.15b9-1, which provides an 
exemption from association membership for certain exchange members. Securities Exchange Act Release 
No. 95388 (July 29, 2022), 87 FR 49930 (Aug. 12, 2022) (proposing to replace a de minimis allowance 
with narrower exemptions from association membership). 
74
  Securities Exchange Act Release No. 42450 (Feb. 23, 2000), 65 FR 10577 (Feb. 28, 2000) (“Market 
Fragmentation Concept Release”). 
75
  Id. at 10580. 
76
  Id. (emphasis in original). 

39 
 
Commission further stated that competition among multiple competing markets can isolate 
investor orders and that this “may reduce competition on price, which is one of the most 
important benefits of greater interaction of buying and selling interest in an individual 
security.”
77
 
In 2005, the Commission adopted Regulation NMS to consolidate the NMS rules it had 
previously adopted under section 11A and to include new rules designed to modernize and 
strengthen equity market structure.
78
 It again emphasized the importance of competition among 
orders to obtain the best prices for investors, stating that this basic principle was recognized in 
the legislative history of section 11A: “Investors must be assured that they are participants in a 
system which maximizes the opportunities for the most willing seller to meet the most willing 
buyer.”
79
 The Commission summed up its approach to achieving an NMS as resisting 
suggestions that it adopt an approach focusing on a single form of competition that, while 
perhaps easier to administer, “would forfeit the distinct, but equally vital, benefits associated 
with both competition among markets and competition among orders.”
80
 
Four categories of the Regulation NMS rules are particularly important in the context of 
Proposed Rule 615: (1) consolidated market data; (2) order handling and execution; (3) access to 
trading centers; and (4) disclosure of order routing practices and order execution statistics. 
                                                
77
  Id. (emphasis in original).  
78
  Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (“Regulation 
NMS Adopting Release”). 
79
  Id. at 37499 (quoting H.R. Rep. 94-123, 94th Cong., 1st Sess. 50 (1975)). The Commission further quoted 
this legislative history for section 11A of the Exchange Act to emphasize the importance of ensuring that 
investor orders are able to be executed in a market with the best price: “‘market fragmentation becomes of 
increasing concern in the absence of mechanisms designed to assure that public investors are able to obtain 
the best price for securities regardless of the type or physical location of the market upon which his 
transaction may be executed.’” Id. at 37499 n.13. 
80
  Id. 

40 
 
 
Several rules under Regulation NMS set forth requirements for consolidated market data, 
which, as defined in Rule 600(b)(19) and (21) of Regulation NMS, includes information 
concerning quotations and transactions in NMS stocks. 17 CFR 242.601 (“Rule 601”) provides 
for the dissemination of transaction information; 17 CFR 242.602 (“Rule 602”) provides for the 
dissemination of quotation information; 17 CFR 242.603 (“Rule 603”) requires, among other 
things, the national securities exchanges and national securities associations to act jointly for 
disseminating consolidated market data; and 17 CFR 242.608 (“Rule 608”) addresses the joint-
NMS plans that currently are responsible for operating the facilities for collecting and 
disseminating consolidated market data in NMS stocks.  
In 2020, the Commission adopted a new rule and amended existing rules to establish a 
new infrastructure for consolidated market data and to update and significantly expand the 
content of consolidated market data (“MDI Rules”).
81
 The MDI Rules have not yet been 
implemented and, as discussed below, given their unimplemented status, the description of 
Proposed Rule 615 in section IV below reflects the regulatory structure currently in place for 
consolidated market data. Section VII below addresses the economic effects of Proposed Rule 
615, taking into account both the regulatory structure currently in place and the unimplemented 
MDI Rules. This section III.B.1 first will briefly summarize the currently implemented 
regulatory structure for consolidated market data. It then will discuss the status of the 
                                                
81
  Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596 (Apr. 9, 2021) (“MDI Adopting 
Release”); see also The Nasdaq Stock Market LLC, et al v. SEC, No. 21-1100 (D.C. Cir. May 24, 2022) 
(upholding these Commission amendments to market data rules adopted in the MDI Adopting Release). 
The MDI Adopting Release provides a comprehensive discussion of the current arrangements for 
consolidated market data, as well as the adopted but unimplemented rules to change these current 
arrangements. 

41 
 
implementation of MDI Rules and how it would not affect the operation of and need for 
Proposed Rule 615. 
 
As stated in section II.B above, consolidated market data currently is collected and 
disseminated by the centralized SIPs. For quotation information, only the 16 exchanges that 
currently trade NMS stocks provide quotation information to the SIPs for dissemination in 
consolidated market data.
82
 FINRA has the only SRO display-only facility (the ADF) for 
quotations. No broker-dealer, however, currently uses the ADF to display quotations in NMS 
stocks in consolidated market data. For transaction information, all of the national securities 
exchanges that trade NMS stocks and FINRA provide real-time transaction information to the 
SIPs for dissemination in consolidated market data. Such information includes the symbol, price, 
and size of the transaction. A notable difference, however, between the transaction information 
provided by the national securities exchanges and the transaction information provided by 
FINRA is that the identity of the particular exchange that executed a trade is included in 
consolidated market data, while the identity of the particular FINRA member responsible for 
                                                
82
  Currently, these national securities exchanges are: Cboe BYX Exchange, Inc. (“Cboe BYX”); Cboe BZX 
Exchange, Inc. (“Cboe BZX”); Cboe EDGA Exchange, Inc. (“Cboe EDGA”); Cboe EDGX Exchange, Inc. 
(“Cboe EDGX”); Investors Exchange LLC (“IEX”); Long-Term Stock Exchange, Inc. (“LTSE”); MEMX 
LLC (“MEMX”); MIAX Pearl, LLC (“MIAX PEARL”); Nasdaq BX, Inc. (“Nasdaq BX”); Nasdaq PHLX 
LLC (“Nasdaq Phlx”); The Nasdaq Stock Market LLC (“Nasdaq”); NYSE; NYSE American LLC (“NYSE 
American”); NYSE Arca, Inc. (“NYSE Arca”); NYSE Chicago, Inc. (“NYSE CHX”); and NYSE National, 
Inc. (“NYSE National”). The Commission approved rules proposed by BOX Exchange LLC (“BOX”) for 
the listing and trading of certain equity securities that would be NMS stocks on a facility of BOX known as 
BSTX LLC (“BSTX”), but BSTX is not yet operational. See Securities Exchange Act Release Nos. 94092 
(Jan. 27, 2022), 87 FR 5881 (Feb. 2, 2022) (SR-BOX-2021-06) (approving the trading of equity securities 
on the exchange through a facility of the exchange known as BSTX); 94278 (Feb. 17, 2022), 87 FR 10401 
(Feb. 24, 2022) (SR-BOX-2021-14) (approving the establishment of BSTX as a facility of BOX). BSTX 
cannot commence operations as a facility of BOX until, among other things, the BSTX Third Amended and 
Restated Limited Liability Company Agreement approved by the Commission as rules of BOX is adopted. 
Id. at 10407. 

42 
 
reporting a trade, such as a wholesaler or other type of broker-dealer, is not included in 
consolidated market data.
83
 
 
When implemented, the MDI Rules will modify the current regulatory structure for 
consolidated market data in two respects. First, they will enhance the content of consolidated 
market data by defining three new data elements as “core data”
84
 — (1) information about better 
priced quotations in higher priced stocks (to be implemented through a new definition of “round 
lot”
85
 and the inclusion of certain “odd-lot information”),
86
 (2) information about quotations that 
are outside of the best-priced quotations (to be implemented through a new “depth of book data” 
definition),
87
 and (3) information about orders that are participating in auctions (to be 
implemented through a new definition of “auction information”).
88
 As discussed below in section 
III.B.1.b.ii, the MDI Rules will enhance the content of consolidated market data, but the 
enhanced content of consolidated market data still will not include all of the quotation 
information currently available to market participants that purchase proprietary data feeds that 
are disseminated individually by national securities exchanges. Second, the MDI Rules will 
enhance the provision of consolidated market data by adopting a new decentralized model that 
                                                
83
  Separate from the dissemination of real-time transaction information in consolidated market data, FINRA 
publishes statistics on trading volume at member firms, including ATSs and wholesalers, that are 
aggregated on a weekly basis. Publication of the aggregate volume statistics is delayed by two weeks for 
some NMS stocks and by four weeks for others. The statistics are available at https://www.finra.org/filing-
reporting/otc-transparency. 
84
  The term “core data” is defined in section 600(b)(21) of Regulation NMS. 
85
  The term “round lot” is defined in section 600(b)(82) of Regulation NMS. 
86
  The term “odd lot information” is defined in section 600(b)(59) of Regulation NMS. 
87
  The term “depth of book data” is defined in section 600(b)(26) of Regulation NMS. 
88
  The term “auction information” is defined in section 600(b)(5) of Regulation NMS. 

43 
 
replaces the SIPs with “competing consolidators”
89
 and “self-aggregators.”
90
 Under the 
decentralized model, the relevant SROs (national securities exchanges that trade NMS stocks and 
FINRA) will be required to provide their data directly to multiple competing consolidators and 
self-aggregators rather than to a centralized SIP.
91
 
i. Implementation of the MDI Rules 
In the MDI Adopting Release in 2020, the Commission outlined a phased transition plan 
for the implementation of the MDI Rules.
92
 The first step was the filing of amendments to the 
effective NMS market data plan(s) as required under Rule 614(e) of Regulation NMS.
93
 The 
Commission’s approval of such amendments will be the starting point for the rest of the 
implementation schedule. While the Commission can approve NMS plan amendments within 90 
days of the date of their publication in the Federal Register if the Commission finds them to be 
consistent with the standards set forth in Rule 608 of Regulation NMS,
94
 the Commission may, 
under rule 608(b)(2)(i), institute proceedings to determine whether to approve or disapprove 
proposed amendments, which proceedings must conclude within 180 days of notice publication 
                                                
89
  The term “competing consolidator” is defined in section 600(b)(16) of Regulation NMS. 
90
  The term “self-aggregator” is defined in section 600(b)(83) of Regulation NMS. 
91
  Rule 603(b) of Regulation NMS requires, among other things, 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 its information with respect to quotations for and transactions in NMS stocks. 
92
  MDI Adopting Release, supra note 81, 86 FR at 18698-18701.  
93
  17 CFR 242.614(e). The participants of the effective NMS market data plan(s) filed proposed amendments 
on Nov. 5, 2021, which were published for comment in the Federal Register. Securities Exchange Act 
Release Nos. 93615 (Nov. 19, 2021), 86 FR 67800 (Nov. 29, 2021); 93625 (Nov. 19, 2021), 86 FR 67517 
(Nov. 26, 2021); 93620 (Nov. 19, 2021), 86 FR 67541 (Nov. 26, 2021); 93618 (Nov. 19, 2021), 86 FR 
67562 (Nov. 26, 2021) (“MDI Plan Amendments”). 
94
  17 CFR 242.608(b)(2). 

44 
 
of the proposed amendments but can be extended by an additional 120 days.
95
 Therefore, the 
maximum time permitted under rule 608 for Commission action is 300 days. 
After the Commission finds that the plan amendments required under Rule 614(e) are 
consistent with the Rule 608 standards and approves such amendments, the next step will be a 
180-day development period, during which competing consolidators can register with the 
Commission. The development period is followed by a 90-day testing period.
96
 Once the testing 
period concludes, a 180-day parallel operation period will begin during which the SIPs and the 
decentralized consolidation model will operate in parallel.
97
 
Within 90 days of the end of the parallel operation period, the operating committee(s) of 
the effective NMS plan(s), in consultation with relevant market participants, will make a 
recommendation to the Commission as to whether the SIPs should be decommissioned. The SIPs 
will only cease operations to the extent that the Commission approves an amendment pursuant to 
Rule 608 to the effective NMS plan(s) to effectuate such a cessation.
98
  
                                                
95
  17 CFR 242.608(b)(2). The Commission instituted proceedings to determine whether to approve or 
disapprove the MDI Plan Amendments. Securities Exchange Act Release Nos. 94310 (Feb. 24, 2022), 87 
FR 11748 (Mar. 2, 2022); 94309 (Feb. 24, 2022), 87 FR 11763 (Mar. 2, 2022); 94308 (Feb. 24, 2022), 87 
FR 11755 (Mar. 2, 2022); 94307 (Feb. 24, 2022), 87 FR 11787 (Mar. 2, 2022). 
96
  MDI Adopting Release, supra note 81, 86 FR at 18699-700. 
97
  During the parallel operation period, the SIPs will continue to disseminate the data that they currently 
disseminate and competing consolidators will be permitted to offer consolidated market data products, 
including odd-lot information. Because the round lot definition will be implemented during a later phase 
consistent with the MDI Adopting Release, the SIPs and competing consolidators will collect, consolidate 
and disseminate NMS data that will be based on the current national securities exchange definitions of 
round lot. Id. at 18699-18701. 
98
  Id. at 18701. Following the cessation of the operations of the SIPs, the changes necessary to implement the 
new round lot sizes will be tested for 90 days and then implemented. Id. The Commission also is proposing 
to accelerate implementation of the round lot sizes. See Securities Exchange Act Release No. 96494 (Dec. 
14, 2022) (File No. S7-30-22) (Regulation NMS: Minimum Pricing Increments, Access Fees, and 
Transparency of Better Priced Orders) (“Minimum Pricing Increments Proposal”). The Commission 
encourages commenters to review that proposal to determine whether it might affect their comments on this 
proposing release. 

45 
 
The plan participants of two effective NMS plans filed the MDI Plan Amendments on 
November 5, 2021.
99
 On September 21, 2022, the Commission disapproved the proposed 
amendments.
100
 As a result, new proposed amendments pursuant to Rule 608 will need to be 
developed and filed for implementation of the MDI Rules. 
The Commission does not believe that the subsequent implementation of the MDI Rules 
would substantially affect the operation of Proposed Rule 615. In the existing regulatory 
structure, the national securities exchanges and FINRA would be required to provide the SIPs 
with the necessary data (including the auction messages specified in Proposed Rule 615(c)(1)) 
and the quotation and transaction information specified in the proposed definition of “open 
competition trading center” in Proposed Rule 600(b)(64) of Regulation NMS). When the MDI 
Rules are subsequently implemented, a decentralized model would replace the SIPs, and the 
national securities exchanges and FINRA would provide this information directly to the 
competing consolidators and self-aggregators pursuant to Rule 603(b) of Regulation NMS.
101
  
As noted above, auction information is to be included in the expanded content of 
consolidated market data that can be disseminated by competing consolidators under the MDI 
Rules. Market participants in the decentralized model will have a choice of whether to purchase 
consolidated market data products that include auction information, as well as any of the other 
                                                
99
  See supra note 93. 
100
  Securities Exchange Act Release Nos. 95848 (Sept. 21, 2022), 87 FR 58544 (Sept. 27, 2022); 95849 (Sept. 
21, 2022), 87 FR 58592 (Sept. 27, 2022); 95850 (Sept. 21, 2022), 87 FR 58560 (Sept. 27, 2022); 95851 
(Sept. 21, 2022), 87 FR 58613 (Sept. 27, 2022). 
101
  The MDI Adopting Release states that the benefits of a decentralized model for consolidated market data 
are gains in efficiency and innovation for delivering consolidated market data, reduced content and latency 
differentials between consolidated market data and proprietary market data, and increased market 
resiliency. MDI Adopting Release, supra note 81, 86 FR at 18778. As discussed in section III.B.1.b.ii 
below, the Commission does not believe that these benefits of the MDI Rules substantially reduce the need 
to propose Rule 615 to address the goals stated herein. 

46 
 
components of consolidated market data.
102
 The fees that ultimately are approved for the 
different components of consolidated market data will affect the extent to which market 
participants choose to purchase auction information,
103
 but, as discussed above, the fees are not 
known at this time. Any fees for auction information will be required to be fair, reasonable, and 
not unreasonably discriminatory,
104
 and, as such, the Commission does not anticipate that such 
fees would be so high as to deter a substantial number of market participants interested in 
participating in auctions under Proposed Rule 615 from purchasing consolidated data products 
that include auction information. 
ii. Implementation of the MDI Rules Will Not 
Substantially Reduce the Need to Propose Rule 615 to 
Address the Goals Stated Herein 
As stated in section I above, Proposed Rule 615 is designed to promote order-by-order 
competition and thereby achieve two primary goals for the benefit of investors — (1) obtain 
better prices for the execution of the marketable orders of individual investors that currently are 
segmented at wholesalers, and (2) expand opportunities for such individual investor orders to 
meet directly with other investor orders without the participation of a dealer (such as a 
wholesaler). The MDI Rules would not substantially reduce the need to propose Rule 615 to 
address the goals stated herein. 
                                                
102
  See, e.g., id. at 18751 (competing consolidators will not be required to offer consolidated market products 
that “include all of the content of expanded core data” and market participants “may choose not to take in 
all of the new core data elements in every instance.”).  
103
  See, e.g., id. at 18764 (because fees will depend on future action by the effective NMS system plans, 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 consolidated market data). 
104
  See, e.g., id. at 18773 (the fees for the data content underlying consolidated market data must be “fair, 
reasonable and not unreasonably discriminatory”). 

47 
 
The MDI Rules will enhance the content of consolidated market data and thereby benefit 
those market participants that currently use SIP data and decide to purchase the enhanced 
elements of consolidated market data. As the MDI Adopting Release stated, however, 
implementation of the MDI Rules will not expand the content of data already available to 
sophisticated market participants that purchase the proprietary data feeds that are individually 
disseminated by the national securities exchanges.
105
 The Commission stated its understanding 
that “approximately 50 to 100 firms purchase all of the proprietary [depth-of-book] feeds from 
the exchanges and do not rely on the SIP data for their trading.”
106
 Moreover, these 50 to100 
firms that currently use proprietary data feeds play a significant role in the current market 
structure.
107
 For example, the MDI Adopting Release stated that “nearly all orders entered in the 
[NMS], including retail orders, touch a component (typically the order router of the executing 
broker) that uses proprietary data in order to reduce execution costs and improve execution 
quality.”
108
 Furthermore, the Commission understands that the wholesalers, as six of the highest 
volume trading firms in the U.S. equity markets, currently pay for and use the proprietary data 
feeds. One wholesaler submitted a comment on the MDI Rules stating that it would be unable to 
remain competitive, even after the MDI Rules were implemented, without continuing to purchase 
proprietary data feeds.
109
 
                                                
105
  See, e.g., id. at 18752 (“[a]lthough expanded core data will not contain all of the data contained in 
proprietary [depth of book] feeds, the Commission believes that it will contain data that will be useful for 
market participants”); id. at 18754 (the potentially lower cost of consolidated market data “will come at the 
expense of losing the full set of data currently available via proprietary feeds,” because the consolidated 
market data definition “does not include all data elements currently available via proprietary data feeds.”). 
106
  Id. at 18728. 
107
  See, e.g., id. at 18734 n. 1724 (Commission analysis showed that 91.6% of the message volume on 
exchanges in a sample week came from just 50 firms that use proprietary data feeds). 
108
  Id. at 18734. 
109
  Id. at 18793 n. 2386 (commenters agreed that “switching to new consolidated market data would come with 
this expense of losing some data compared to the proprietary data feeds,” with one stating that it would be 

48 
 
Statements in the MDI Adopting Release addressing the benefits of the MDI Rules are 
consistent with a conclusion that the MDI Rules can benefit SIP data users that currently do not 
purchase the proprietary data feeds, but will not substantially reduce the need to propose Rule 
615 to address the goals stated herein. For example, the MDI Adopting Release stated that the 
“odd-lot aggregation methodology” of the MDI Rules “would benefit market participants by 
promoting tighter spreads in all stocks, especially high priced ones.”
110
 All of the odd lot 
quotations that will be aggregated, however, were already included in an order-by-order basis in 
the proprietary data feeds that the Commission understands the wholesalers use. As the MDI 
Adopting Release stated, the inclusion of odd-lot quote information in core data will improve 
transparency and “reduce information asymmetry between market participants who already 
receive this information through proprietary [depth-of-book] feeds and market participants who 
choose to subscribe to this aspect of core data and previously did not receive this information.
111
  
In addition, the MDI Adopting Release states that “because richer, more timely 
consolidated market data may enhance the ability of broker-dealers to obtain the most favorable 
terms reasonably available under the circumstances, including the best reasonably available price 
and other factors, for their customer orders, broker-dealers should consider the availability of 
consolidated market data for purposes of evaluating best execution.”
112
 The availability of 
additional quotation information in consolidated market data, however, is unlikely to affect the 
                                                
“unable to remain competitive even after the final amendments are in place without continuing to purchase 
proprietary data feeds.”); see also id. at 18795 (stating possibility that potential participants in automated 
market making and other latency sensitive trading businesses could not “compete effectively without using 
the data that would remain exclusive to proprietary feeds”). 
110
  MDI Adopting Release, supra note 81, 86 FR at 18615. 
111
  Id. at 18753. 
112
  Id. at 18605 (footnotes omitted). 

49 
 
wholesalers’ and retail brokers’ evaluation of best execution because the Commission 
understands that wholesalers already would be expected, under FINRA guidance,
113
 to use a 
more complete set of quotation information (i.e., proprietary data feeds) than will be available in 
the expanded MDI data when evaluating best execution today, and retail brokers use wholesalers 
as executing brokers to obtain the best terms reasonably available.  
The MDI Adopting Release also stated that “as a result of the new round lot definition 
and the inclusion of odd-lot quotations in core data, retail investors will be able to see, and more 
readily access, better-priced quotations.”
114
 Such information will, depending on the fees yet to 
be determined for such information (as stated above), enable those retail investors that purchase 
such information (or for those retail investors whose broker-dealers purchase it for them) to see 
and more readily access better-priced quotations than the current NBBO disseminated by the 
SIPs. To do so, retail investors will need to direct their own orders to the particular trading center 
that is displaying a better-priced quotation. As stated in the MDI Adopting Release, however, 
most retail investors rely on their broker-dealers for execution of their orders, and the additional 
quotation information will likely be used by more sophisticated retail investors that are able to 
process quotation information and self-direct their orders.
115
  
                                                
113
  The MDI Adopting Release referred to this FINRA guidance concerning the relevance of proprietary data 
feeds to a broker-dealer’s best execution efforts under FINRA rules. Id. at 18605 n. 94 (quoting FINRA 
Notice to Members 15-46, Guidance on Best Execution Obligations in Equity, Options and Fixed Income 
Markets at 3 n. 12 (Nov. 2015), available at https://www.finra.org/rules-guidance/notices/15-46 (“FINRA 
Notice 15-46”). The relevant portion of FINRA Notice 15-46 provides the following guidance on 
compliance with FINRA Rule 5310: “[A] firm that regularly accesses proprietary data feeds, in addition to 
the consolidated SIP feed, for its proprietary trading, would be expected to also be using these data feeds to 
determine the best market under prevailing market conditions when handling customer orders to meet its 
best execution obligations.” 
114
  Id. at 18601. 
115
  See, e.g., id. at 18753 (“the Commission believes, as suggested by commenters, that retail brokers may 
allow some sophisticated retail investors to directly utilize the expanded content of core data and realize the 
benefits discussed below”). 

50 
 
The MDI Adopting Release also stated that “through the addition of depth of book data 
and auction information in core data, the scope of NMS information will, to a greater extent, 
allow some market participants to trade in a more informed, competitive, and efficient 
manner.”
116
 The phrase “some market participants” as discussed above, refers to those market 
participants that currently rely on SIP data for trading and not the proprietary data feeds. For the 
marketable orders of individual investors that currently are routed to wholesalers, the expansion 
of depth of book data in consolidated market data will not affect the information used for their 
execution because the Commission understands that wholesalers currently use proprietary data 
feeds for evaluating the best execution of their orders, which include more information than the 
expanded consolidated market data of the MDI Rules. 
An aspect of the MDI Rules that will affect the public evaluation of wholesaler order 
execution quality is smaller round lot sizes for quotations in NMS stocks with prices greater than 
$250 per share. These quotations determine the NBBO, and smaller round lot sizes can lead to 
narrower NBBO spreads. As discussed in section II above, the NBBO is a benchmark used to 
assess the market for an NMS stock, as well as to retrospectively assess the level of execution 
quality for an order. Accordingly, although implementation of the MDI Rules will not increase 
the information available to wholesalers in proprietary data feeds, changes in the round lot 
definition could narrow the NBBO as a public benchmark for the execution quality of the 
marketable orders of individual investors. 
The Commission does not believe, however, the smaller round lot sizes for NMS stocks 
with prices that exceed $250 per share will substantially affect the need for Proposed Rule 615 in 
terms of improved order execution quality for the marketable orders of individual investors. In 
                                                
116
  Id. at 18601. 

51 
 
particular, Proposed Rule 615 would encompass all NMS stocks, while the new round lot 
definition will encompass a much smaller range of NMS stocks and trading volume. In the MDI 
Adopting Release, for example, Table 3 and Table 4 set out the range of stocks and volume 
estimated to be affected by the new round lot definition. This information is summarized below: 
Round Lot Tier 
Number of 
NMS Stocks 
% Average 
Daily Share 
Volume 
% Average 
Daily Dollar 
Volume 
% Instances of 
Smaller NBBO 
$0-$250 9,023 97.12 71.93 n/a 
$250.01-$1,000 117 2.79 23.24 26.6 
$1,000.01-$10,000 16 0.09 4.82 47.7 
$10,000+ 1 0.00 0.02 n/a 
 
First, as stated in the MDI Adopting Release, “most stocks, approximately 98.5%, will 
remain unaffected” by the new round lot definition.
117
 The 98.5% of unaffected NMS stocks with 
prices of $250 or less represented 97.12% of total NMS stock share volume and 71.93% of total 
NMS stock dollar volume. Thus, the great majority of NMS stocks and their volume would not 
be affected by the narrowing of the NBBO benchmark that will result from the new round lot 
definition in the MDI Rules.
118
 
Second, for the estimated 1.5% of high-priced NMS stocks (over $250) that will be 
affected by the reduction in round lot sizes, the Commission estimated that most of the dollar 
volume (23.24% of total NMS stock dollar volume) will occur within the $250.01-$1000 tier, but 
in this tier, the NBBO spread will be reduced for only 26.6% of the trading day.
119
 For the 
remaining 73.4% of the trading day in these NMS stocks, the NBBO spread in these NMS stocks 
                                                
117
  MDI Adopting Release, supra note 81, 86 FR at 18743 (Table 4). 
118
  Id. at 18753 (“Even though the new round lot definition would expand information on odd-lots that may be 
priced better than the current NBBO in some stocks, most stocks would not be affected by the new round 
lot definition.”) (footnotes omitted). 
119
  Id. at 18743 (Table 3). 

52 
 
will be unaffected.
120
 Accordingly, even for the 1.5% of NMS stocks that will be affected by the 
revised round lot definition, NBBO spreads were estimated to remain unaffected for the most of 
the trading day. 
This conclusion is consistent with statements in the MDI Adopting Release. For example, 
the MDI Adopting Release states that “the size of the change in the NBBO spread, conditional 
on the NBBO being smaller, will also be substantial.”
121
 The phrase “conditional on the NBBO 
being smaller”
122
 means that the reduction in size of the half spread is limited to the 1.5% of 
stocks and their volume that, as discussed above, will be affected by the new odd lot definition. 
As a result, there will be a significant reduction in half spread of the NBBO for those stocks, but 
this reduction is conditional on the minority of the trading day for 1.5% of NMS stocks when 
NBBO spreads actually will be affected by the new round lot definition.  
Third and finally, the NBBO as a benchmark for order execution quality does not, as 
discussed in section II.C above, reflect the availability of prices better than round lot displayed 
quotations. Such better prices include displayed odd lot quotations and undisplayed orders at 
national securities exchanges, as well as the availability of NBBO price improvement at 
wholesalers that is enabled by the low adverse selection costs of the marketable orders of 
individual investors. In the MDI Adopting Release, the Commission considered whether a 
                                                
120
  Id. (Table 4). For NMS stocks with prices of $1000.01 to $10,000, which represented 4.82% of trading 
volume, the Commission estimated that, taking into account the new round lot definition, the NBBO spread 
would be reduced to some extent for 47.7% of the trading day. Id. (Tables 3-4). 
121
  Id. at 18744. 
122
  Similarly, the following statement in the MDI Adopting Release is conditional on those instances where the 
NBBO spread is smaller: “The Commission believes that, in particular, for securities with a significant 
amount of dollar trading volume, there will be significant changes to (tightening of) the quoted spread 
displayed under the new round lot definition.” Id. at 18743. 

53 
 
narrowing of the NBBO spread would affect the order execution quality of retail investors.
123
 
While it stated that a narrowing of the NBBO spread would, by definition, reduce the level of 
NBBO price improvement if execution prices for retail investors remained the same,
124
 the 
Commission stated that “retail investors might or might not” experience an improvement in 
execution quality, “as measured by execution prices,” from wholesalers.
125
 The Commission 
stated that a retail broker commented that retail investors would not receive better execution 
prices under the new round lot sizes because wholesalers already offer price improvement to 
retail investors that exceeds the potential improvements in the NBBO from the new round lot 
size.
126
 Another commenter stated that all investors, including retail investors, would experience 
reduced execution costs from a tighter NBBO no matter where the execution took place.
127
 The 
Commission concluded that it was “uncertain” whether the execution quality that retail investors 
receive from wholesalers would change if the NBBO spread narrows because the effect “would 
depend on how the change in the NBBO compared to the current price improvement offered by 
wholesalers,” as well as on “changes in the degree of price improvement wholesalers will offer 
in stocks with tighter NBBOs, which is uncertain.”
128
  
As stated above, the Commission understands that wholesalers already would be 
expected, under FINRA guidance, to use proprietary data feeds, which contain a fuller set of 
                                                
123
  Id. at 18747 (section addressing “effects of internalization on retail order flow”). 
124
  Id. (“it may become more difficult for the retail execution business of wholesalers to provide price 
improvement and other execution quality metrics at levels similar to those provided under the 100 share 
round lot definition today”). 
125
  Id. 
126
  Id. 
127
  Id. 
128
  Id. 

54 
 
quotations than will be included in the new round lot definition, when, among other things, 
evaluating best execution. Consequently, the new round lot definition will not change the 
quotation data used by wholesalers to determine prices for executing the orders of individual 
investors, but rather will change the NBBO as benchmark for analysis of order execution quality 
at wholesalers.
129
 Moreover, narrowing the NBBO as a benchmark for execution quality of 
wholesalers will affect all wholesalers equally. For example, if the average NBO for an NMS 
stock declined by two cents, the NBO as a benchmark would reduce the calculation of NBBO 
price improvement by two cents for all wholesalers and therefore leave them in the same relative 
position when compared to each other. The Commission does not believe that implementation of 
the new round lot definition in the MDI Rules will substantially affect the need for Proposed 
Rule 615 in terms of an improvement in the order execution quality of the marketable orders of 
individual investors. 
 
Broker-dealers owe their customers a duty of best execution when handling and 
executing customer orders.
130
 This duty of best execution derives from common law agency 
principles and fiduciary obligations, and is incorporated in SRO rules and enforced through the 
antifraud provisions of the Federal securities laws.
131
 The Commission has stated that “the duty 
                                                
129
  Id. at 18745 (“the new round lot definition will also improve transaction cost analysis and best execution 
analysis in higher priced stocks, which are benchmarked against the NBBO”). 
130
  The Commission also is proposing a new rule addressing the best execution obligations of broker-dealers. 
See Securities Exchange Act Release No. 96496 (Dec. 14, 2022) (File No. S7-32-22) (Regulation Best 
Execution) (“Regulation Best Execution Proposal”). The Commission encourages commenters to review 
that proposal to determine whether it might affect their comments on this proposal. 
131
  See MDI Adopting Release, supra note 81, 86 FR at 18605. In addition, FINRA has codified a duty of best 
execution in its rules, requiring a broker-dealer to “use reasonable diligence to ascertain the best market for 
the subject security and buy or sell in such market so that the resultant price to the customer is as favorable 
as possible under prevailing market conditions.” FINRA Rule 5310, “Best Execution and Interpositioning.” 

55 
 
of best execution generally requires broker-dealers to execute customers’ trades at the most 
favorable terms reasonably available under the circumstances, i.e., at the best reasonably 
available price.”
132
 Broker-dealers should periodically assess the quality of competing markets to 
assure that order flow is directed to the markets providing the most beneficial terms for their 
customer orders.
133
 In doing so, broker-dealers must take into account price improvement 
opportunities, and whether different markets may be more suitable for different types of orders 
or particular securities.
134
  
After the enactment of section 11A in 1975, which included as an objective the 
practicability of brokers’ executing investor orders in the best market,
135
 the Commission 
adopted rules that prescribe requirements for the handling and execution of orders in NMS stocks 
in certain contexts. These rules were often designed, at least in part, to promote best execution of 
investors’ orders. Three rules in Regulation NMS, discussed below, specifically address the 
handling and execution of orders in NMS stocks — 17 CFR 242.604 (“Rule 604,” also known as 
the “Limit Order Display Rule”), 17 CFR 242.611 (“Rule 611,” also known as the “Order 
Protection Rule”), and 17 CFR 242.612 (“Rule 612,” also known as the “Sub-Penny Rule”).  
                                                
132
 See MDI Adopting Release, supra note 81, 86 FR at 18605 (quoting Regulation NMS Adopting Release, 
supra note 78, 70 FR at 37538); see also Geman v. SEC, 334 F.3d 1183, 1186 (10th Cir. 2003) (quoting 
Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir. 1998)) (“[T]he duty of 
best execution requires that a broker-dealer seek to obtain for its customer orders the most favorable terms 
reasonably available under the circumstances.”); and Kurz v. Fidelity Management & Research Co., 556 
F.3d 639, 640 (7th Cir. 2009) (describing the “duty of best execution” as “getting the optimal combination 
of price, speed, and liquidity for a securities trade”). 
133
  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37538. 
134
  See id. 
135
  Section 11A(a)(1)(C)(iv) of the Exchange Act; see also supra note 57 and accompanying text.  

56 
 
 
The Limit Order Display Rule was originally adopted in 1996 as Rule 11Ac1–4 and 
redesignated as Rule 604 with the adoption of Regulation NMS in 2005.
136
 It establishes 
minimum display requirements for customer limit orders that are not executed immediately, 
which, as discussed in section II.C above, can be referred to as “non-marketable” limit orders. In 
contrast to marketable limit orders, non-marketable limit orders cannot be executed immediately 
at the NBBO. Rule 604 requires specialists and OTC market makers to display the price and full 
size of customer limit orders when these orders represent buying and selling interest that is at a 
better price than a specialist’s or OTC market maker’s public quotation.
137
 Specialists and OTC 
market makers also must increase the size of their quotation for a particular security to reflect a 
limit order of greater than de minimis size when the limit order is priced equal to the specialist’s 
or OTC market maker’s disseminated quotation and that quotation is equal to the NBBO.
138
 
In adopting Rule 604, the Commission observed that the enhanced transparency of such 
orders would increase the likelihood that customer limit orders would be executed because 
contra-side market participants would have a more accurate picture of trading interest in a given 
security, and that the increased visibility would enable market participants to interact directly 
with limit orders, rather than rely on the participation of a dealer for execution.
139
 The 
                                                
136
  Regulation NMS Adopting Release, supra note 78, 70 FR at 37570. Modifications included conforming 
terms to those adopted with Regulation NMS, such as changing references from “covered security” to 
“NMS stock.” Id. at 37572. 
137
  Rule 604(b)(1) provides exceptions for, among other things, orders executed immediately upon receipt and 
odd lot orders. 
138
  See Securities Exchange Act Release No. 37619A (Sep. 6, 1996), 61 FR 48290, 48290 (Sep. 12, 1996) 
(Order Execution Obligations) (adopting final rules to require the display of customer limit orders and 
amending a rule governing publication of quotations) (“1996 Order Handling Release”); Rule 604(a). 
139
  See 1996 Order Handling Release, supra note 138, 61 FR at 48293. 

57 
 
Commission also stated that the display requirement (together with other amendments being 
made at the time) would help ensure the disclosure of customer and market maker buying and 
selling interest that had, prior to adoption of Rule 604, been hidden from many market 
participants.
140
 
 
In 2005, the Commission adopted the Order Protection Rule as Rule 611 of Regulation 
NMS. Rule 611(a) applies to “trading centers,” which is defined broadly in Rule 600(b)(95) as a 
national securities exchange or national securities association that operates an SRO trading 
facility, an ATS, an exchange market maker, an OTC market maker, or any other broker or 
dealer that executes orders internally by trading as principal or crossing orders as agent.  
Rule 611(a)(1) requires trading centers to implement written policies and procedures 
reasonably designed to prevent trade-throughs — the execution of an order at a price that is 
inferior to the price of a “protected quotation.”
141
 To be protected, a quotation must be 
immediately and automatically accessible up to its full displayed size, must be the best-priced 
quotation (highest bid to buy and lowest offer to sell) in round lot sizes of an exchange or 
                                                
140
  Id. at 48292. The Commission also adopted amendments to require a market maker to publish quotations 
for any listed security when it is responsible for more than 1% of the aggregate trading volume for that 
security and to make publicly available any superior prices that a market maker privately quotes through 
certain electronic communications networks (“ECNs”). Id. at 48292. Also, at the same time it adopted the 
Limit Order Display Rule in 1996, the Commission deferred action on a proposed rule to address the 
handling of customer market orders of less than block size, referred to as the “Price Improvement Rule.” Id. 
at 48322. This proposed rule would have required specialists and OTC market makers to provide their 
customer market orders an opportunity for price improvement. The proposal included a non-exclusive safe 
harbor to satisfy the price improvement obligation that included exposing the customer order for 30 
seconds at an improved price in a published quotation. The proposal sought to improve opportunities in 
auction and dealer markets for market orders to interact directly with other market orders and public limit 
orders, consistent with the goals of an NMS. Id. 
141
  Rule 600(b)(70) defines “protected bid” or “protected offer” as a quotation in an NMS stock that: (i) is 
displayed by an automated trading center; (ii) is disseminated pursuant to an effective NMS plan; and 
(iii) is an automated quotation that is the best bid or best offer of a national securities exchange, or the best 
bid or best offer of a national securities association. 

58 
 
FINRA, and must be disseminated in consolidated market data.
142
 Accordingly, Rule 611 
provides for intermarket price protection only of an exchange’s or FINRA’s best bid and offer 
(“BBO”). It does not establish time priority among the same-priced quotations at different 
trading centers, nor does it protect “depth-of-book” quotations (quotations with prices outside an 
exchange’s or FINRA’s BBO) or odd lot quotations (quotations with sizes of less than one round 
lot). 
In adopting Rule 611, the Commission stated that strong intermarket price protection 
offers greater assurance, on an order-by-order basis, to investors who submit market orders that 
their orders in fact will be executed at the best readily available prices, which can be difficult for 
investors, particularly individual investors, to monitor.
143
 One of the Commission’s concerns 
when adopting Rule 611 was the internalization of individual investor orders by broker-dealers. 
The Commission observed that the great majority of internalized trades are the small trades of 
individual investors, and that, in 2003, nearly 1 out of every 30 of these trades, of which there are 
millions, appears to have been executed at a price inferior to an automated and accessible 
quotation.
144
 The Commission stated that Nasdaq’s data submitted in response to the Rule 611 
proposal appeared to indicate a need for regulatory action to reinforce the fundamental principle 
of best price for all NMS stocks.
145
 
                                                
142
  Rule 600(b)(71) defines “protected quotation” as a protected bid or a protected offer. As stated in section 
II.B.1 above, no FINRA member currently uses the ADF, its facility for displaying quotations, to 
disseminate quotations in consolidated market data. Today, only exchanges display protected quotations 
under Rule 611. 
143
  Regulation NMS Adopting Release, supra note 78, 70 FR at 37505. 
144
  Id. at 37508. 
145
  Id. In response to the Commission’s proposal to adopt Regulation NMS, The Nasdaq Stock Market, Inc. 
(n.k.a. Nasdaq) submitted data to show that the trade-through rates for Nasdaq stocks in some trading 
centers had dropped from the Fall of 2003 to the Fall of 2004, and that the reduction during that time was a 
result of fewer independently operating ECNs. The Commission stated “[i]t is unlikely that ECN 

59 
 
 
Also in 2005, the Commission adopted the Sub-Penny Rule as Rule 612 of Regulation 
NMS to establish a minimum pricing increment for NMS stocks. Specifically, paragraph (a) of 
Rule 612 provides that no national securities exchange, national securities association, ATS, 
vendor, or broker or dealer shall display, rank, or accept from any person a bid or offer, an order, 
or an indication of interest in any NMS stock priced in an increment smaller than $0.01 if that 
bid or offer, order, or indication of interest is priced equal to or greater than $1.00 per share.
146
 
Rule 612 does not, however, prohibit a sub-penny trade by a wholesaler or other internalizing 
broker-dealer, as long as the trade did not result from an impermissible sub-penny quotation, 
order, or indication of interest.
147
 For example, Rule 612 does not prevent wholesalers, after they 
receive an order from a broker, from choosing to execute that order in a transaction at a sub-
penny price. This includes a trade executed at a price that is a sub-penny increment better than 
the best displayed quotation in consolidated market data.
148
 This sub-penny trading exception is 
not available to market participants on exchanges and ATSs,
149
 in contrast, because those trading 
centers operate by accepting, matching, and executing orders from market participants. 
Exchanges and ATSs, with limited exceptions, may only execute orders at a sub-penny price if 
                                                
consolidation could have caused such a major reduction in trade-through rates at securities dealers when 
they execute their customer orders internally.” Id. (footnote omitted). 
146
  17 CFR 242.612(a). Paragraph (b) of Rule 612 sets forth a minimum increment of $0.0001 for prices less 
than $1.00 per share. 
147
  The Commission also is proposing to amend Rule 612 regarding sub-penny trading. See Minimum Pricing 
Increments Proposal, supra note 98. The Commission encourages commenters to review that proposal to 
determine whether it might affect their comments on this proposing release. 
148
  Regulation NMS Adopting Release, supra note 78, 70 FR at 37556 (the Commission stated that sub-penny 
executions due to price improvement are generally beneficial to retail investors). 
149
  The regulatory framework for ATSs is discussed in section III.B.3 below. 

60 
 
the price is the NBBO midpoint.
150
 Also, exchanges with retail liquidity programs (“RLPs”) have 
been granted an exemption from Rule 612 to provide executions in tenths of a penny.
151
 The 
Commission has granted exemptions for these programs to promote competition between 
exchanges and OTC market makers (which, as discussed above, includes wholesalers).
152
 As 
                                                
150
  Neither Rule 612 nor any other Commission rule or interpretation states that exchanges and ATSs may 
execute midpoint orders at a sub-penny amount (e.g., if the NBBO is 10.00-10.01 to execute at the mid-
point price of 10.005). However, the Commission has stated that Rule 612 will not prohibit a sub-penny 
execution resulting from a midpoint or volume-weighted algorithm or from price improvement, so long as 
the execution did not result from an impermissible sub-penny order or quotation. Regulation NMS 
Adopting Release, supra note 78, 70 FR at 37556. Undisplayed “floating” midpoint orders (i.e., orders that 
re-price when the exchange BBO changes), for example, are permissible under Rule 612, and the 
Commission has approved numerous rule proposals by national securities exchanges for their use. See, e.g., 
Securities Exchange Act Release Nos. 89563 (Aug. 14, 2020), 85 FR 51510 (Aug. 20, 2020) (SR-PEARL-
2020-03) (order approving proposed rule change by MIAX PEARL to establish rules governing the trading 
of equity securities, including a midpoint peg order type); and 78101 (June 17, 2016), 81 FR 41142 (June 
23, 2016) (File No. 10-222) (order approving IEX’s registration as a national securities exchange, including 
the exchange’s inclusion of a midpoint pegged order type in its rulebook).  
151
  Several exchanges operate RLPs. These are programs for retail orders seeking liquidity that allow market 
participants to supply liquidity to such retail orders by submitting undisplayed orders priced at least $0.001 
better than the exchange’s protected best bid or offer. Each program results from a Commission approval of 
a proposed rule change made on Form 19b-4 combined with a conditional exemption, pursuant to section 
36 of the Exchange Act, from Rule 612 to enable the exchange to accept and rank (but not display) the sub-
penny orders. See, e.g., Securities Exchange Act Release Nos. 85160 (Feb. 15, 2019), 84 FR 5754 (Feb. 22, 
2019) (SR-NYSE-2018-28) (approving the NYSE RLP on a permanent basis and granting the exchange a 
limited exemption from the Sub-Penny Rule to operate the program); 86194 (June 25, 2019), 84 FR 31385 
(July 1, 2019) (SR-BX-2019-011) (approving Nasdaq BX’s retail price improvement program on a 
permanent basis and granting the exchange a limited exemption from the Sub-Penny Rule to operate the 
program). 
152
  Id. See also Securities Exchange Act Release No. 73702 (Nov. 28, 2014), 79 FR 72049 (Dec. 4, 2014) (SR-
BX-2014-048) (approving Nasdaq BX’s (f/k/a NASDAQ OMX BX Inc.) establishment of its retail price 
improvement program on a pilot basis). In granting the original exemption from Rule 612, the Commission 
stated that the vast majority of “marketable retail orders” are internalized by OTC market makers, and that 
retail investors can benefit from such arrangements to the extent that OTC market makers offer them price 
improvement over the NBBO. This price improvement is typically offered in sub-penny amounts. The 
Commission explained that OTC market makers typically select a sub-penny price for a trade without 
quoting at that exact amount or accepting orders from retail customers seeking that exact price; and that 
exchanges—and exchange member firms that submit orders and quotations to exchanges—cannot compete 
for “marketable retail order flow” on the same basis, because it would be impractical for exchange 
electronic systems to generate sub-penny executions without exchange liquidity providers or retail 
brokerage firms having first submitted sub-penny orders or quotations, which the Sub-Penny Rule 
expressly prohibits. The Commission explained that the limited exemption granted to operate the retail 
price improvement program should promote competition between exchanges and OTC market makers in a 
manner reasonably designed to minimize the problems that the Commission identified when adopting the 
Sub-Penny Rule. Id. at 72053. 

61 
 
discussed in section VII below, however, the great majority of marketable orders of individual 
investors continue to be routed first to wholesalers. 
 
As stated above, access to trading centers and their services is a critically important 
component of the NMS as a means to link trading centers together in a unified system. For 
example, the Regulation NMS rules addressing the display of quotations, the display of customer 
limit orders, and protection of customer orders cannot achieve their objectives if market 
participants do not have fair and efficient means to access those trading centers that display 
quotations and execute orders.
153
  
For purposes of assessing access requirements in today’s NMS, trading centers for NMS 
stocks can be divided into three distinct regulatory categories: national securities exchanges, 
NMS Stock ATSs, and internalizing broker-dealers (including wholesalers). As discussed below, 
the statutory access requirements and the Commission’s access rules currently apply to 
exchanges and ATSs, as well as to FINRA members that display quotations in consolidated 
market data through FINRA’s ADF (of which there currently are none). In contrast, broker-
dealers that do not display quotations in consolidated market data and that trade outside of an 
ATS, such as wholesalers, are not subject to any fair access requirements under the Exchange 
Act or Commission rules. While subject to Commission and SRO rules for broker-dealers, 
internalizing broker-dealers are not prohibited from restricting access to their trading 
mechanisms and the investor orders that they internalize. An internalizing broker-dealer is not 
required, for example, to provide other market participants, including institutional investors and 
                                                
153
  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37538. The rules discussed in this section 
address requirements that apply to trading centers providing access to their services. Exchange Act Rule 
15c3-5, in contrast, addresses access, but in the context of risk management controls for broker-dealers 
with market access. 

62 
 
liquidity providers on exchanges, with any opportunity to compete to provide the best prices to 
the individual investor orders that the broker-dealer executes internally. 
 
As stated in section III.A above, the Exchange Act directly requires national securities 
exchanges to provide fair access in four contexts.
154
 Section 6(b)(2) specifies that exchange rules 
must allow “any” broker-dealer registered with the Commission, unless subject to a specified 
disqualification, to become a member of the exchange. Section 6(b)(4) requires that exchange 
rules provide for the “equitable” allocation of “reasonable” dues, fees, and other charges among 
members, issuers, and other persons using exchange facilities. Section 6(b)(5) broadly requires 
that exchange rules be designed, among other things, to remove impediments to and perfect the 
mechanism of a free and open market and an NMS, and that exchange rules are not designed to 
permit unfair discrimination between customers, issuers, brokers, or dealers. And section 6(b)(8) 
requires that exchange rules do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. 
In addition to these broad statutory requirements for all national securities exchanges, the 
Commission has adopted 17 CFR 242.610 (“Rule 610”) of Regulation NMS, which addresses 
access to displayed quotations.
 
Specifically, Rule 610(a) prohibits any national securities 
exchange that operates an SRO trading facility
155
 from imposing unfairly discriminatory terms 
that would prevent or inhibit any person from obtaining efficient access through a member of the 
national securities exchange to the quotations in an NMS stock displayed through its SRO 
                                                
154
  See supra notes 61-66 and accompanying text. 
155
  Rule 600(b)(89) defines an “SRO trading facility” as a facility operated by or on behalf of a national 
securities exchange or a national securities association that executes orders in a security or presents orders 
to members for execution. 

63 
 
trading facility. This provision is designed to prohibit national securities exchanges from limiting 
“piggyback access” as a means by which non-members obtain access to exchange quotations 
through the services of an exchange member.
156
 Piggyback access, for example, allows non-
members to obtain access to a national securities exchange’s quotations without the need to 
obtain (and pay for) direct connectivity to the exchange. 
 
In 1998, the Commission initiated a new regulatory regime for ATSs with the adoption of 
Regulation ATS.
157
 An ATS is a trading system that falls within the definition of exchange in 
Section 3(b)(1) of the Exchange Act, but is exempted from such definition by Rule 3a1-1 under 
the Exchange Act if the trading system complies with Regulation ATS.
158
 For an NMS Stock 
ATS,
159
 Regulation ATS requires, among other things, that the NMS Stock ATS must register 
with the Commission as a broker-dealer and must file a Form ATS-N, a publicly available 
document that includes detailed disclosures about the NMS Stock ATS’s operations. 
In addition, Regulation ATS includes two separate types of access requirements that 
potentially can apply to an NMS Stock ATS. First, Rule 301(b)(3) imposes order display and 
execution access requirements on an NMS Stock ATS that displays orders to any person and had 
5% or more of average daily volume reported in an NMS stock during four of the preceding six 
calendar months. Similar to Rule 610, the “execution access” requirement of Rule 301(b)(3) is 
                                                
156
  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37539. Rule 610(c) also limits the fees that 
can be charged for accessing an exchange’s best-priced displayed quotations, and Rule 610(d) addresses 
locking and crossing quotations. 
157
  See Regulation ATS Adopting Release, 63 FR 70844, supra note 27. “Regulation ATS” consists of 17 CFR 
242.300 through 242.304 (“Rule 300” through “Rule 304” under the Exchange Act). 
158
  17 CFR 240.3a1-1.  
159
  In 2018, the Commission amended Regulation ATS with respect to the requirements that apply to NMS 
Stock ATSs. Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018) 
(“ATS-N Adopting Release”).  

64 
 
limited to access to displayed quotations in consolidated market data. As stated above in section 
III.B.1, FINRA’s ADF is a facility for broker-dealers (including ATSs) to display quotations in 
consolidated market data. Currently, no NMS Stock ATS that displays quotations uses the ADF 
to display its quotations in consolidated market data, and no NMS Stock ATS is subject to the 
execution access requirement of Rule 301(b)(3). 
Second, Rule 301(b)(5) imposes “fair access” requirements with respect to an NMS stock 
in which the NMS Stock ATS had 5% or more of the average daily volume reported during four 
of the preceding six calendar months. This fair access requirement requires an NMS Stock ATS 
(1) to establish written standards for granting access to trading on its systems, (2) to not 
unreasonably prohibit or limit any person in respect to access to services offered by such ATS by 
applying the written access standards in an unfair or discriminatory manner, (3) to maintain 
records of grants, denials, and limitations of access, and (4) to report the information required by 
Form ATS-R on grants, denials, and limitations of access. When it adopted Regulation ATS, the 
Commission emphasized that the fair access requirements of Rule 301(b)(5) apply to a far 
broader range of services than the “execution access” requirements of Rule 301(b)(3), which are 
limited to access to quotations. Specifically, the Commission stated that although it was adopting 
rules to require ATSs with significant trading volume to publicly display their best bid and offer 
and provide equal access to those orders, direct participation in ATSs offers benefits in addition 
to execution against the best bid and offer. The Commission gave as an example that direct 
participants could enter limit orders into the system, rather than just execute against existing 
orders on a fill-or-kill basis,
160
 and that direct participants could view all orders, not just the best 
bid or offer, which provides important information about the depth of interest in a particular 
                                                
160
  A fill-or-kill order is an order with instructions to cancel the order if it cannot be executed in its full size. 

65 
 
security. The Commission further observed that some ATSs also allowed direct participants to 
enter “reserve” orders which hide the full size of an order from view. Because of these 
advantages to direct participants in an ATS, access to the best bid and offer through an SRO 
provided an incomplete substitute. Therefore, the Commission adopted rules to require most 
ATSs that have a significant percentage of overall trading volume in a particular security to 
comply with fair access standards.
161
 
In sum, the fair access requirements of Rule 301(b)(5) encompass all of the trading 
services of an NMS Stock ATS. When adopting these requirements, the Commission emphasized 
that an “alternative trading system must apply [fair access] standards fairly and is prohibited 
from unreasonably prohibiting or limiting any person with respect to trading in any equity 
securities.”
162
  
Currently, only a single NMS Stock ATS discloses on its Form ATS-N that it is subject 
to these fair access requirements for securities that are available for trading on its platform.
163
 
NMS Stock ATSs that are not subject to fair access requirements are not prohibited from unfairly 
discriminating with respect to the trading services they offer broker-dealers and other market 
participants. 
 
As stated in section III.B.2 above, Rule 611 protects the best-priced displayed quotations 
of FINRA members that use the ADF to display quotations in consolidated market data (though 
no FINRA member currently uses the ADF to do so). In adopting Rule 611, the Commission 
                                                
161
  Regulation ATS Adopting Release, supra note 27, 63 FR at 70872 (footnote omitted). 
162
  See id. at 70873.  
163
  See supra note 29 and accompanying text. 

66 
 
recognized that assuring fair and efficient access to FINRA members displaying quotations in the 
ADF would be essential, given that other market participants were required by rule to not trade 
through such quotations.
164
 The ADF falls within the definition of an “SRO display-only facility” 
in Rule 600(b)(88) because it merely displays the quotations of its participants and neither 
executes orders itself nor presents orders to ADF participants for execution. Instead, market 
participants must obtain their own means of access to ADF participants to trade with ADF 
protected quotations. Accordingly, the Commission adopted Rule 610(b) to promote such access 
to ADF participants.
165
 Rule 610(b)(2) imposes the same piggyback access requirement that 
applies to exchanges under Rule 610(a), thereby assuring that market participants can obtain 
indirect access to an ATS’s or broker-dealer’s quotations in the ADF.  
In addition, however, Rule 610(b)(1) imposes an access requirement that is particularly 
tailored to address concerns presented by FINRA members (including NMS Stock ATSs) 
displaying quotations in the ADF. Specifically, Rule 610(b)(1) requires that any trading center 
that displays quotations in NMS stocks through an SRO display-only facility must provide a 
level and cost of access to such quotations that is substantially equivalent to the level and cost of 
access to quotations displayed by SRO trading facilities (such as national securities exchanges). 
The Commission emphasized that the phrase “level and cost of access” would encompass both 
(1) the policies, procedures, and standards that govern access to quotations of the trading center, 
and (2) the connectivity through which market participants can obtain access and the cost of such 
                                                
164
  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37540 (discussing Rule 610, which 
addresses means of access to quotations). The Regulation NMS Adopting Release refers to National 
Association of Securities Dealers (“NASD”) members. NASD was the predecessor association to what 
today is FINRA. 
165
  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37502-03; see also id. at 37539-43. 

67 
 
connectivity.
166
 The Commission further stated that trading centers that choose to display 
quotations in an SRO display-only facility would be required to bear the responsibility of 
establishing the necessary connections to afford fair and efficient access to their quotations, and 
the nature and cost of these connections for market participants seeking to access the trading 
center’s quotations would need to be substantially equivalent to the nature and cost of 
connections to SRO trading facilities.
167
 
In addition to these heightened access requirements for FINRA members (including NMS 
Stock ATSs) that display quotations in the ADF, the Commission stated that FINRA, as the self-
regulatory authority responsible for enforcing compliance by ADF participants with the 
requirements of the Exchange Act, would need to evaluate the connectivity of ADF participants 
to determine whether they meet the requirements of Rule 610(b)(1).
168
 The Commission also 
stated that the addition of a new ADF participant would constitute a material aspect of the 
operation of FINRA’s facilities, and thus require the filing of a proposed rule change pursuant to 
section 19(b) of the Exchange Act that would offer an opportunity for public notice and 
comment.
169
 
 
Rule 606 of Regulation NMS requires broker-dealers to publish quarterly reports on their 
routing of customer orders in NMS stocks, and Rule 605 of Regulation NMS requires market 
centers to make data files publicly available on a monthly basis that include a variety of statistics 
                                                
166
  Regulation NMS Adopting Release, supra note 78, 70 FR at 37549. 
167
  Id. 
168
  Id. 
169
  Id. 

68 
 
on their execution of orders in NMS stocks.
170
 When it originally adopted the two rules in 2000, 
the Commission stated that, by increasing the visibility of order execution and routing practices, 
the rules were “intended to empower market forces with the means to achieve a more 
competitive and efficient [NMS] for public investors.”
171
 
Rule 606 requires broker-dealers to disclose, among other things, the percentage of non-
directed customer orders routed to different trading centers, as well as the financial inducements 
offered by these trading centers to attract order flow.
172
 Information must be provided for four 
types of orders — market orders, marketable limit orders, non-marketable limit orders, and other 
orders. The enhanced disclosures include a requirement to disclose net aggregate amounts of 
PFOF received from trading centers or amounts paid to them (such as transaction fees on 
exchanges), both as a total dollar amount and an amount per 100 shares. 
Rule 605 requires market centers to disclose standardized statistics about the execution 
quality they achieve for “covered orders,” as defined in Rule 600(b)(22) of Regulation NMS.
173
 
In general, the definition of covered orders excludes order types for which the customer requests 
                                                
170
  The rules that the Commission originally adopted were designated as Rule 11Ac1-6 and Rule 11Ac1-5. The 
Commission re-designated Rule 11Ac1-6 as Rule 606 and Rule 11Ac1-5 as Rule 605 when it adopted 
Regulation NMS in 2005. Regulation NMS Adopting Release, supra note 78, 70 FR at 37538. The term 
“market center,” as defined in Rule 600(b)(46) of Regulation NMS, is somewhat narrower than trading 
center. Market centers include, for example, national securities exchanges, ATSs, and OTC market makers 
(including wholesalers), but do not include the broad catch-all category of trading center that encompasses 
any broker-dealer that executes orders internally as principal or agent. 
171
  Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75427 (Dec. 1, 2000). The 
Commission enhanced the order routing disclosure requirements of Rule 606 when it amended the rule in 
2018. Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018). 
172
  A “non-directed order” is defined in Rule 600(b)(56) of Regulation NMS to mean any order from a 
customer other than a directed order, and a “directed order” is defined in Rule 600(b)(27) of Regulation 
NMS to mean an order from a customer that the customer specifically instructed the broker-dealer to route 
to a particular venue for execution. 
173
  Rule 605(a)(1). The Commission also is proposing to amend the order execution quality disclosures 
required by Rule 605. See Securities Exchange Act Release No. 96493 (Dec. 14, 2022) (File No. S7-29-22)  
(Disclosure of Order Execution Information). The Commission encourages commenters to review that 
proposal to determine whether it might affect their comments on this proposing release. 

69 
 
special handling that could detract from the goal of achieving comparable statistics for similar 
order types across different market centers. Unlike the Rule 606 disclosures, the Rule 605 data 
files are not designed to be human-readable and instead consist of a large volume of detailed 
statistics for each of the NMS stocks in which a market center receives covered orders. The data 
files are published in a format that is designed to be downloaded and processed with analysis 
software, such as a spreadsheet program, which then can be used to generate summary reports 
for viewing. 
IV. Description of Proposed Rule 615 
A. Overview of Order Competition Requirement 
Paragraph (a) of Proposed Rule 615 sets forth the rule’s core competition requirement. It 
states that a restricted competition trading center shall not execute a segmented order 
internally
174
 until after a broker-dealer has exposed such order to competition at a specified limit 
price in a qualified auction operated by an open competition trading center. As discussed below 
in this section IV: (1) segmented order, open competition trading center, restricted competition 
trading center, and qualified auction are new terms proposed to be defined in Rule 600(b) of 
Regulation NMS; (2) certain exceptions to the order competition requirement are set forth in 
paragraph (b) of Proposed Rule 615; (3) the requirements for a qualified auction are specified in 
paragraph (c) of Proposed Rule 615; and (4) the requirements with respect to segmented orders 
that would be imposed on open competition trading centers, originating brokers, all broker-
                                                
174
  The applicability of paragraph (a) of Proposed Rule 615 to “internally” executed transactions is designed to 
accommodate the practice of some trading centers that both execute orders internally and obtain executions 
of orders externally by seeking liquidity at other trading centers. Cf. Rule 600(b)(95) of Regulation NMS 
(definition of “trading center” includes “any other broker or dealer that executes orders internally by 
trading as principal or crossing orders as agent”).  

70 
 
dealers, and national securities exchanges are set forth in paragraphs (d) through (g) of Proposed 
Rule 615. 
The term “segmented order,” as proposed to be defined in Proposed Rule 600(b)(91) of 
Regulation NMS, is a key term determining the scope of Proposed Rule 615 and is designed to 
encompass those orders of individual investors with relatively low adverse selection costs.
175
 In 
addition, paragraphs (b)(2) and (b)(3) of Proposed Rule 615 would provide exceptions for larger 
orders ($200,000 or more) and orders that are executed at favorable prices for individual 
investors (orders executed at the NBBO midpoint or better); paragraph (b)(4) would provide an 
exception for limit orders that have a limit price that is equal to or more favorable for the 
segmented order than the NBBO midpoint (i.e., non-marketable segmented orders with a limit 
price that is equal to or lower than the midpoint for buy orders and equal to or higher than the 
NBBO midpoint for sell orders); and paragraph (b)(5) would provide an exception for orders 
sized less than one share and for the fractional component, if any, of a segmented order if no 
qualified auction is available to execute the fractional share or fractional component.
176
  
The purpose of the order competition requirement is to expose segmented orders to 
competition to provide the best prices on an order-by-order basis and thereby minimize the 
                                                
175
  As discussed in IV.B.1 below, the proposed definition of “segmented order” would exclude very active 
traders whose orders are likely to impose a much higher level of adverse selection costs on liquidity 
providers than the less-active accounts that are more typical of individual investors. This is done by 
limiting the proposed definition of “segmented orders” to orders for accounts in which the average daily 
number of trades executed in NMS stocks was less than 40 in each of the six preceding calendar months.  
176
  As discussed in section IV.B.1 below, the proposed definition of “segmented order” does not include a 
limit price component. Compliance with the order competition requirement for limit orders would vary 
depending on the relation of any limit price and an execution price to the NBBO. For example, segmented 
orders that have a limit price, or are executed at a price, equal to or more favorable for the segmented order 
than the NBBO midpoint or better, would have an exception under paragraph (b)(3) or (b)(4) of Proposed 
Rule 615(b). Segmented orders with a limit price beyond the NBBO midpoint (higher for segmented orders 
to buy and lower for segmented orders to sell) could still qualify for the exception in Proposed Rule 
615(b)(3) if they were executed at the NBBO midpoint or better (i.e., such an order would have been 
executed at a more favorable price for the segmented order than its limit price). 

71 
 
transaction costs incurred by individual investors when they use marketable orders. Proposed 
Rule 615 would allow flexibility for broker-dealers, wholesalers, and other restricted competition 
trading centers in how they comply with the rule. A broker-dealer could choose, subject to its 
best execution responsibilities as discussed further below, to route a segmented order directly to 
a qualified auction, to an open competition trading center, or to a national securities exchange. 
Alternatively, a broker-dealer could route such segmented order to another destination, such as a 
routing broker-dealer, a wholesaler, or other restricted competition trading center, which, in turn, 
could route the segmented order to a qualified auction, to an open competition trading center, or 
to a national securities exchange.  
For illustrative purposes, the following is one example of how a segmented order could 
be handled and executed in compliance with Proposed Rule 615. Assume that a broker-dealer 
routed a customer’s segmented order to a wholesaler. The wholesaler that received the 
segmented order could select a price at which it was willing to execute a segmented order 
internally. Before executing internally, however, the wholesaler would be required to submit the 
segmented order to a qualified auction with a specified limit price. As discussed further below, 
the specified limit price is not a price at which the wholesaler is guaranteeing to execute (i.e., it 
is not a “reserve” price or a “backstop” of the segmented order).
177
 Rather, the specified limit 
price would inform auction responders on how to price their orders and also, if the segmented 
order did not receive an execution in the qualified auction, would be the price (or better) at which 
the wholesaler or other restricted competition trading center subsequently could execute the 
segmented order as soon as reasonably possible. 
                                                
177
  If the segmented order is not executed in the qualified auction, however, the wholesaler could choose to 
execute the segmented order internally at the specified limit price or better. 

72 
 
The wholesaler that submitted the segmented order to a qualified auction would have a 
choice of whether to participate in the qualified auction by submitting its own auction response. 
The wholesaler could, for example, use its selected price for execution of the segmented order as 
the specified limit price in the qualified auction or, alternatively, the wholesaler could pick a less 
aggressive price as the specified limit price for the qualified auction and participate in the 
qualified auction by submitting an auction response with its more aggressive selected price. The 
open competition trading center operating the qualified auction would widely disseminate an 
auction message, which would include the specified limit price, in consolidated market data that 
would invite auction responses. During the qualified auction, the full range of market 
participants with the technological capability of responding to a fast (sub-second) auction, such 
as exchange market makers and institutional investors through their broker-dealers’ smart order 
routers (“SORs”), would have an opportunity to compete to provide the best price for the 
segmented order by submitting auction responses. If all or part of the segmented order could be 
executed in the qualified auction at the specified limit price or better, the open competition 
trading center operating the qualified auction would execute the segmented order pursuant to the 
execution priority rules set by the open competition trading center running the qualified auction, 
consistent with the execution priority requirements of Proposed Rule 615(c)(5). If the segmented 
order did not receive a full execution in the qualified auction, the unexecuted order, or 
unexecuted portion thereof, would be canceled back to the wholesaler, who could, as soon as 
reasonably possible, execute the segmented order, or unexecuted portion thereof, internally at a 
price that was equal to or better for the segmented order than the specified limit price. As 
discussed below, the wholesaler would not, however, be required to execute the unexecuted 
segmented order or unexecuted portion of the segmented order at the specified limit price. Any 

73 
 
unexecuted segmented order, or any unexecuted portion thereof, would continue to be subject to 
the order competition requirements of Proposed Rule 615(a).  
Given the absence of a “reserve price” or “backstop” requirement, a segmented order 
would not have certainty of an execution in a qualified auction at a price equal to the NBBO or 
better, but the marketable orders of individual investors orders today also do not have certainty 
of execution for orders routed to wholesalers. As shown in Table 7 in section VII.B.4 below, 
1.67% of marketable order shares in NMS stocks (and 3.61% of marketable order shares in non-
S&P 500 stocks) receive executions at prices that are outside the NBBO at the time the 
wholesaler received the order. This low percentage of orders executed outside the NBBO when 
routed to wholesalers is consistent with the low probability that the NBBO will move away from 
individual investor orders in the very short time period of a qualified auction.
178
 For the reasons 
discussed in section VII.C.2.b.i below, the Commission does not believe that segmented orders 
would have significantly greater risk of inferior execution prices under Proposed Rule 615 than 
currently provided by wholesalers, but the variability of execution prices could increase.  
In sum, Proposed Rule 615 would allow segmented orders to continue to be executed 
internally by a wholesaler or other restricted competition trading center, but not until after the 
execution price had been exposed to order-by-order competition in a fair and open qualified 
auction. In addition, qualified auctions would give the trading interest of other investors, 
particularly institutional investors, an opportunity to interact directly (without the participation of 
a dealer) with, and thus execute against, the marketable orders of individual investors. When 
investor orders are able to interact directly at a fully competitive price without the intermediation 
                                                
178
  See infra section VII.C.2.b.i (the fade probability of the NBBO prices goes from an average of 1.8% at 25 
milliseconds after an internalized individual investor order, to 2.8% at 100 milliseconds, and to 4.6% at 300 
milliseconds). 

74 
 
of a wholesaler or other dealer, two investors (both the buyer and the seller) are able to benefit 
mutually from a single trade, thereby promoting the NMS objective that, consistent with the 
objectives of economically efficient execution of securities transactions and the practicability of 
brokers executing investors’ orders in the best market, investors’ orders have an opportunity to 
be executed without the participation of a dealer.
179
 
Proposed Rule 615 does not limit the types of broker-dealers that would be permitted to 
submit segmented orders for execution in a qualified auction. For example, a retail broker that 
currently routes segmented orders directly to a wholesaler could instead route such orders 
directly to a qualified auction with a specified limit price selected by the retail broker. Such 
specified limit price would need to be consistent with its best execution responsibilities and the 
terms of the order as set by the customer. If the segmented order did not receive an execution in 
the auction at the specified limit price, the retail broker could, as soon as reasonably possible, 
route the segmented order to a wholesaler with a representation that the segmented order had 
cleared (i.e., not received an execution in) a qualified auction at that price. The wholesaler then 
could, in compliance with Proposed Rule 615, as soon as reasonably possible, execute the 
segmented order internally at the specified limit price or better. 
If a segmented order did not receive an execution in a qualified auction (regardless of 
whether submitted to the auction by a retail broker, a wholesaler, or other broker-dealer), a 
wholesaler that received such order following the conclusion of a qualified auction would not be 
required by Proposed Rule 615 to execute the order internally. If a wholesaler chose not to 
execute the order internally following the conclusion of a qualified auction, the segmented order, 
as with all segmented orders, would need to be further handled in compliance with Proposed 
                                                
179
  See Section 11A(a)(1)(C)(v) of the Exchange Act. 

75 
 
Rule 615. For example, (1) the wholesaler could return the order to the retail broker or other 
broker-dealer for further handling (such as resubmission to a qualified auction with a revised 
specified limit price); (2) the wholesaler itself could resubmit the segmented order to a qualified 
auction with a revised specified limit price;
180
 or (3) the wholesaler could route the order directly 
to an open competition trading center or national securities exchange (as national securities 
exchanges are not restricted competition trading centers subject to Proposed Rule 615(a)) for an 
immediate execution on its continuous order book. The decision on how to handle segmented 
orders that clear qualified auctions without executions also would be governed by the relevant 
best execution responsibilities of retail brokers and wholesalers. 
As indicated in the above example and subject to relevant best execution responsibilities, 
a broker-dealer responsible for obtaining the execution of a segmented order has the option of 
routing the order directly to the continuous order book
181
 of an open competition trading center 
or national securities exchange for execution, without exposure in a qualified auction. The 
definition of restricted competition trading center would exclude all open competition trading 
centers and all national securities exchanges.
182
 They would be excluded because both of these 
types of trading centers either are not permitted by the Exchange Act currently, or would not be 
permitted by Proposed Rule 615, to unfairly restrict access to their continuous order books.
183
 
                                                
180
  The revised specified limit price set by the wholesaler would have to be consistent with the terms of the 
order, such as the limit price set by the customer, if any, as well as with the wholesaler’s best execution 
responsibilities.  
181
  See infra section IV.B.2 (discussing the proposed definition of “continuous order book”). 
182
  See Proposed Rule 600(b)(87) and discussion in section IV.B.3 below. 
183
  Section III.B.2 above discusses the Exchange Act provisions that currently prohibit a national securities 
exchange from unfairly restricting access. Section IV.B.2 below discusses the proposed access requirement 
for any open competition trading center that is not a national securities exchange (i.e., an NMS Stock ATS). 
In many cases, an open competition trading center also would be a national securities exchange. As 

76 
 
Consequently, segmented orders routed directly to the continuous order books of open 
competition trading centers and national securities exchanges would be subject to competition to 
provide the best prices on an order-by-order basis, and thus would not be isolated.
184
  
Importantly, however, all relevant broker-dealer best execution responsibilities would 
govern the extent to which segmented orders could be routed to an open competition trading 
center or national securities exchange without first clearing a qualified auction. As discussed in 
section III.B.2 above, best execution generally requires a broker-dealer to obtain the best terms 
reasonably available for customer orders. Because liquidity providers can profitably offer better 
prices to segmented orders of individual investors with low adverse selection costs as compared 
to the prices they can offer other types of order flow, trading mechanisms that offer such 
segmentation, as would a qualified auction, are quite likely to obtain better prices for segmented 
orders than other trading mechanisms, such as the continuous order book of an open competition 
trading center or national securities exchange, that commingle all types of order flow.
185
 A 
broker-dealer would need to consider the opportunity for better prices in its best execution 
analysis. 
There may be market conditions when a best execution analysis could indicate that a 
broker-dealer should route segmented orders directly to the continuous order book of an open 
competition trading center or national securities exchange. One example could be a “fast market” 
                                                
discussed in section IV.B.2 below, however, some national securities exchanges would not meet the 
definition of an open competition trading center. 
184
  As discussed in sections IV.D and IV.G below, open competition trading centers and national securities 
exchanges would not be allowed to operate a mechanism limited, in whole or in part, to segmented orders, 
including RLPs, barring an exception from Proposed Rule 615. See infra notes 258, 259 and accompanying 
text.  
185
  See, e.g., infra section VII.C.1.b (discussing anticipated benefits of improved execution quality for retail 
orders exposed in qualified auctions). 

77 
 
– when publicly quoted prices are moving rapidly away when a broker-dealer receives a 
marketable order (that is, rapidly up in price for orders to buy or rapidly down in price for orders 
to sell). In these market conditions, the broker-dealer could determine that best prices could be 
obtained by immediately attempting to execute segmented orders against the NBBO on an open 
competition trading center or national securities exchange, rather than first submitting segmented 
orders to qualified auctions when market conditions suggest that auction would be unlikely to 
generate better prices than the NBBO. Proposed Rule 615 is designed to give broker-dealers 
sufficient flexibility to obtain best execution of individual investor orders in the full range of 
market conditions. 
B. Coverage of Proposed Rule 615 
 
The term “segmented order,” as proposed to be defined in Proposed Rule 600(b)(91)
186
 of 
Regulation NMS, would have two parts. First, the order for an NMS stock must be for an 
account of a natural person, or an account held in legal form on behalf of a natural person or 
group of related family members. Second, for such an account, the average daily number of 
trades executed in NMS stocks must be less than 40 in each of the preceding six calendar 
months. The intent of the proposed definition is to encompass the marketable orders of 
individual investors with expected low adverse selection costs that retail brokers currently route 
to wholesalers for handling and execution. These orders already are segmented in practice.  
                                                
186
  Rule 600(b) of Regulation NMS sets forth defined terms. Rule 600(b) would be amended to insert new 
defined terms used in Proposed Rule 615, and existing defined terms would be renumbered accordingly. 
Cross references to Rule 600(b) throughout the rules and regulations under the Exchange Act would also be 
amended to reflect the new numbering. 

78 
 
The proposed definition’s limitation to “natural persons” draws on the approach in 
existing rules designed to identify the orders of individual investors. For example, the definition 
of “retail customer” in the Commission’s Regulation Best Interest (“Regulation BI”) is limited to 
a “natural person.”
187
 Moreover, several national securities exchanges operate programs for 
trading “retail” orders that are limited to accounts of natural persons or certain accounts on 
behalf of natural persons.
188
 The proposed definition of segmented order is closely related to 
                                                
187
  17 CFR 240.15l-1(b)(1) (defining “retail customer” as, among other things, as a natural person who 
receives a recommendation of any securities transaction from a broker-dealer and uses the recommendation 
primarily for personal, family, or household purposes). Proposed Rule 615 does not incorporate all of the 
definition of “retail customer” in Regulation BI, because that definition is limited to when there is a 
recommendation to a retail customer. Proposed Rule 615, in contrast, is designed to promote competition 
for individual investor orders, regardless of whether such investor is self-directed. Moreover, Proposed 
Rule 615 is focused on limiting the extent to which an account may generate orders with a high level of 
adverse selection costs. As discussed below, Proposed Rule 615 includes a trading activity threshold 
designed to address this policy concern. The definition of “retail investor” for purposes of 17 CFR 249.641 
(“Form CRS”) (Relationship Summary for Brokers and Dealers Providing Services to Retail Investors) is 
also limited to “natural persons” and defines “retail investor” as a natural person, or the legal representative 
of such natural person, who seeks to receive or receives services primarily for personal, family or 
household purposes. In the context of Form CRS, the term “retail investor” is used in connection with 
disclosures to prospective customers, and as in the context of Regulation BI, relates to the relationship 
between an investor and a financial professional. See Securities Exchange Act Release No. 86031 (June 5, 
2019), 84 FR 33318, 33345 (July 12, 2019) (adopting Regulation Best Interest: The Broker-Dealer 
Standard of Conduct) (”Regulation BI Adopting Release”). Because Proposed Rule 615 is intended to 
improve competition for individual investor orders, and is not related to the relationship between an 
investor and a financial professional, the Commission is not proposing to include the phrase “primarily for 
personal, family, or household purposes” in the definition of segmented order. For purposes of Proposed 
Rule 615, limiting segmented orders to orders for the accounts of natural persons, and specifically those 
with less than 40 trades in NMS stocks in each of the preceding 6 months, is intended to address adverse 
selection costs and is not related to the purposes for which a natural persons may be seeking the services of 
a broker-dealer. 
188
  See supra note 151 (generally describing exchange RLPs). 

79 
 
these rules,
189
 as well as to FINRA’s fee schedule for Nasdaq’s Trade Repository Facility.
190
 
Patterning the definition of segmented order on existing SRO rules is designed to leverage 
market knowledge and to facilitate compliance with Proposed Rule 615. This would help reduce 
the costs of compliance because broker-dealers would already be familiar with identifying orders 
as for the accounts of natural persons, or for related accounts, in these other contexts. In addition 
to the accounts of natural persons themselves, the definition would, again consistent with SRO 
rules, cover accounts held in legal form on behalf of natural persons or groups of related family 
members.  
For purposes of the definition of “segmented order,” a “group of related family members” 
would be defined broadly to include a group of natural persons with any of the following 
relationships: child, stepchild, grandchild, great grandchild, parent, stepparent, grandparent, great 
grandparent, domestic partner, spouse, sibling, stepbrother, stepsister, niece, nephew, aunt, uncle, 
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, 
including adoptive and foster relationships; and any other natural person (other than a tenant or 
employee) sharing a household with any of the foregoing natural persons.
191
 This definition is 
                                                
189
  E.g., IEX Rule 11.190(b)(15) (providing, among other things, that “[a] Retail order must reflect trading 
interest of a natural person” and that “[a]n order from a retail customer can include orders submitted on 
behalf of accounts that are held in a corporate legal form—such as an Individual Retirement Account, 
Corporation, or a Limited Liability Company—that have been established for the benefit of an individual or 
group of related family members, provided that the order is submitted by an individual.”); and Nasdaq, 
Equity 7, section 118 (defining a “Designated Retail Order” as originating from a “natural person” and 
explaining that “[a]n order from a ‘natural person’ can include orders on behalf of accounts that are held in 
a corporate legal form—such as an Individual Retirement Account, Corporation, or a Limited Liability 
Company—that has been established for the benefit of an individual or group of related family members, 
provided that the order is submitted by an individual”). 
190
  FINRA Rule 7620A (defining a “Retail Order” as originating from a “natural person” and explaining that 
“[a]n order from a ‘natural person’ can include orders on behalf of accounts that are held in a corporate 
legal form, such as an Individual Retirement Account, Corporation, or a Limited Liability Corporation that 
has been established for the benefit of an individual or group of related family members, provided that the 
order is submitted by an individual”). 
191
  Proposed Rule 600(b)(91)(iii). 

80 
 
designed to be broad so as not to restrict the types of arrangements that may be set up to benefit 
family groups, including individual retirement accounts, corporations, and limited liability 
companies for the benefit of related family members.
192
  
The second part of the proposed definition of segmented orders focuses on the frequency 
of trading in an account. It would limit the average daily number of trades executed in NMS 
stocks in an account to less than 40 for each of the six preceding calendar months. This part of 
the proposed definition would exclude very active traders whose orders are likely to impose a 
much higher level of adverse selection costs on liquidity providers than the less-active accounts 
that are more typical of individual investors. For example, very active traders may use 
sophisticated trading tools, such as application programming interfaces (APIs) and computer 
algorithms, to submit their orders. These tools can enable highly active trading strategies that 
impose much higher adverse selection costs on liquidity providers than the manual placement of 
orders by a natural person. Rather than prohibiting any opportunity for investors to use 
potentially beneficial trading tools,
193
 however, the proposed definition specifies a maximum 
level of trading activity as a means to limit the level of adverse selection costs. 
The proposed level is supported by an analysis of the distribution of order activity across 
accounts reported to the Consolidated Audit Trail as being held for the benefit of an “Individual 
                                                
192
  Given the proposed broad definition of “group of related family members” in Proposed Rule 600(b)(91), an 
account held in legal form on behalf of a group of related family members could include some accounts 
with an extensive portfolio of NMS stocks. The second prong of the definition of segmented order, 
however, would exclude accounts with average daily trades of 40 or more and likely would exclude many 
accounts with large portfolios. 
193
  Some SRO rules, for example, prohibit the use of any computerized technology for submitting retail orders. 
See, e.g., NYSE Rule 7.44(a)(3) (defining “retail order” in the context of NYSE’s RLP to require that “the 
order does not originate from a trading algorithm or any other computerized methodology”). 

81 
 
Customer” for the first six months of 2022.
194
 Across this period, slightly more than 99.9% of 
Individual Customer accounts originated, on an average daily basis, 40 or fewer orders 
associated with a trade. The median number of daily-average orders associated with a trade from 
accounts at or below this threshold was less than one.
195
 The median number of daily-average 
orders associated with a trade from accounts above this threshold was approximately 68.
196
 
Accordingly, the threshold in the proposed rule is designed to capture the overwhelming majority 
of individual investor accounts that could benefit from strengthened competition for their orders, 
while excluding accounts that might impose a high level of adverse selection costs on liquidity 
providers. Including orders highly likely to impact short-term price changes in qualified auctions 
could detract from the quality of execution prices for segmented orders as a whole.
197
 
Specifically, including orders with high adverse selection costs in qualified auctions would 
                                                
194
  Analysis of Consolidated Audit Trail data for all orders originated from an account marked as held for the 
benefit of an Individual Customer, Jan. 1, 2022, through June 30, 2022. This analysis counted any order 
associated with one or more trades or fills in an order lifecycle. For the Consolidated Audit Trail, account 
type definitions are available in Appendix G to the CAT Reporting Technical Specifications for Industry 
Members (https://catnmsplan.com), for the field name “accountHolderType.” Account types represent the 
beneficial owner of the account for which an order was received or originated, or to which the shares or 
contracts are allocated. Possible types are: Institutional Customer, Employee, Foreign, Individual 
Customer, Market Making, Firm Agency Average Price, Other Proprietary, and Error. An Institutional 
Customer account is defined by FINRA Rule 4512(c) as a bank, investment adviser, or any other person 
with total assets of at least $50 million. An Individual Customer account means an account that does not 
meet the definition of an “institution” and is also not a proprietary account. Therefore, the CAT account 
type “Individual Customer” includes natural persons as well as corporate entities that do not meet the 
definitions for other account types. 
195
  Id.  
196
  Id. 
197
  In other contexts, national securities exchanges currently characterize certain types of orders according to 
the level of activity associated with a market participant’s account. With respect to trading in listed options, 
several exchanges include the concept of “Professional” order, and these orders, which must be identified 
as such, are distinguished from other customer orders. For example, pursuant to Cboe Exchange, Inc. 
(“CBOE”) Rule 1.1, “Professional” means any person or entity that is not a broker or dealer in securities 
and places more than 390 orders in listed options per day on average during a calendar month for its own 
beneficial account(s). Under CBOE’s rules, all Professional orders are distinguished from other public 
customer orders (i.e., orders for persons other than broker-dealers), must be marked as such, and are 
handled by CBOE’s trading platform in the same manner as broker-dealer orders unless otherwise 
specified. See CBOE Rule 1.1. See also NYSE Arca Rule 1.1; Nasdaq, Options 1, section 1(a)(47); and 
BOX Rule 100(a)(52). 

82 
 
increase the overall level of adverse selection costs of the order flow submitted to qualified 
auctions. Because auction responders could not know in advance whether any particular order 
was likely to impose high adverse selection costs, they would need to adjust the prices of all their 
auction responses to reflect the higher level of adverse selection costs of qualified auction order 
flow as a whole. 
The proposed definition of segmented order does not have a size limitation and therefore 
encompasses orders of all sizes, whether large or small. As discussed in section IV.B.5 below, 
however, the execution of large orders with sizes of $200,000 or more would be eligible for an 
exception from the order competition requirement of Proposed Rule 615(a). Such orders would, 
however, remain segmented orders and, if consistent with a broker-dealer’s best execution 
responsibilities, could be submitted for execution in a qualified auction. 
Orders with small sizes would also be included in the proposed definition of segmented 
orders and would be subject to the order competition requirement. These include both odd lot 
orders with a size of less than one round lot (generally less than 100 shares) and orders with a 
fractional share component (less than one share). As discussed further below, while orders for 
less than one share and orders for more than one share with a fractional share component would 
also fall within the proposed definition of a segmented order, Proposed Rule 615 would include 
an exception for orders for less than one share and for the fractional component of a segmented 
order, if there is no qualified auction available for such orders.
198
  
Finally, the proposed definition of a segmented order does not include a limit price 
component. All segmented orders that are market orders would be subject to the order 
competition requirement prior to execution because, by definition, such orders are instructed to 
                                                
198
  See infra section IV.B.5. 

83 
 
be executed immediately at the best available prices. For segmented orders that are limit orders, 
compliance with the order competition requirement would depend on the relation of the 
segmented order’s limit price to the NBBO at the time it was received by the restricted 
competition trading center. For segmented orders with limit prices that are equal to or more 
favorable for the segmented order than the NBBO midpoint at the time of receipt (lower for buy 
orders and higher for sell orders), execution of the order would qualify for the exceptions from 
the order competition requirement in paragraphs (b)(3) and (b)(4) of Proposed Rule 615. Given 
the favorable price at which these non-marketable orders would be executed, however, they often 
may be publicly displayed as a means to attract contra-side trading interest (as well as to comply 
with Rule 604 of Regulation NMS). 
Segmented orders with a limit price that is less favorable for the segmented order than the 
NBBO midpoint at the time of receipt (i.e., segmented buy orders with a limit price higher than 
the NBBO midpoint and segmented sell orders with a limit price lower than the NBBO 
midpoint) often would not be executed at the NBBO midpoint or better (and therefore would not 
qualify for the exceptions in paragraphs (b)(3) or (b)(4) of Proposed Rule 615(b)(3)). Those 
orders not executed at the NBBO midpoint or better necessarily will pay a half-spread of some 
amount on the transaction (i.e., orders executed beyond the NBBO midpoint, by definition, are 
paying a spread), even if it is less than the full NBBO half-spread. These include segmented 
orders that are marketable and a subset of non-marketable limit orders with limit prices that are 
beyond the NBBO midpoint but within the far-side NBBO (lower than the national best offer for 
segmented orders to buy and higher than the national best bid for segmented orders to sell) 
(hereinafter referred to as “beyond-the-midpoint non-marketable limit orders”). A broker-dealer 
responsible for handling this subset of segmented orders that are non-marketable would need to 

84 
 
determine how to achieve best execution of such orders. Under the limit order display 
requirements of Rule 604 of Regulation NMS, as discussed in section III.B.2.a above, such an 
order generally would need to be immediately displayed (which would narrow the NBBO 
spread) or immediately executed. To immediately execute the order, a restricted competition 
trading center would need to comply with the order competition requirement of Proposed Rule 
615(a). 
 
The term “open competition trading center,” as proposed to be defined in Rule 
600(b)(64), determines the scope of coverage of Proposed Rule 615 in two important respects. 
First, it identifies those trading centers that would be authorized to operate qualified auctions. 
Second, it conversely specifies those trading centers that would be subject to the order 
competition requirement of paragraph (a) of Proposed Rule 615 because a “restricted 
competition trading center” is defined as any trading center other than an open competition 
trading center or a national securities exchange. 
The proposed definition of open competition trading center is designed to address three 
primary concerns. First and foremost, trading centers that operate qualified auctions must offer 
sufficient access, transparency, and trading by a wide range of market participants to support the 
goal of fair competition in auctions to provide the best prices for investor orders. Second, the 
proposed definition of open competition trading center seeks to establish as level a regulatory 
playing field as possible regarding Proposed Rule 615 between the national securities exchanges 
and NMS Stock ATSs
199
 that are eligible to operate a qualified auction, while recognizing the 
                                                
199
  The Commission is proposing that for purposes of Regulation NMS, which would include Proposed Rule 
615, NMS Stock ATS, as would be defined in Proposed Rule 600(b)(59), will have the meaning provided 
in 17 CFR 242.300(k) (Rule 300(k) of Regulation ATS). 

85 
 
distinct regulatory regimes for national securities exchanges under the Exchange Act and for 
NMS Stock ATSs under Regulation ATS.
200
 As described in section III.A above, section 
11A(c)(1)(F) of the Exchange Act grants rulemaking authority to the Commission to assure 
equal regulation of all markets for NMS stocks, with equal regulation defined in section 3(a)(36) 
to mean that no member of a class has a competitive advantage over any other member of a class 
resulting from a regulatory disparity that the Commission determines is unfair and not necessary 
or appropriate in furtherance of the purposes of the Exchange Act.
201
 Qualified auctions would 
be a new trading mechanism, mandated by rule in some contexts, that could be operated by both 
national securities exchanges and NMS Stock ATSs, and open competition trading centers would 
be a new class of market participants. Because national securities exchanges and NMS Stock 
ATSs operating as open competition trading centers would fall within the same class of market 
participant, and given the functional similarity between these two types of trading centers, 
neither type should have a competitive advantage in operating qualified auctions that is 
attributable to an unfair and unnecessary regulatory disparity.
202
 Third, the proposed definition of 
                                                
200
  A trading center that operates a qualified auction for segmented orders necessarily would fall within the 
definition of an exchange under section 3(a)(1) of the Exchange Act [15 U.S.C. 78c(a)(1)], and 17 CFR 
240.3b-16(a) (“Rule 3b-16(a)”) thereunder, because it would be bringing together the orders of multiple 
buyers and sellers using established non-discretionary methods (i.e., the qualified auction trading facility) 
under which such orders would interact and the buyers and sellers would agree upon terms of a trade. If a 
trading center falls within the definition of an exchange, it either must register as an exchange or comply 
with an exemption to such registration, such as the exemption for ATSs under Regulation ATS.  
201
  15 U.S.C. 78c(a)(36). In discussing equal regulation in the context of Exchange Act Section 11A(c)(1), the 
Commission stated that the legislative history of section 3(a)(36) emphasizes that equal regulation “is a 
competitive concept intended to guide the Commission in its oversight and regulation of the trading 
markets and the conduct of the [s]ecurities industry.” See Securities Exchange Act Release No. 42208 
(Dec. 1999), 64 FR 70613, 70623 n.80 (Dec. 17, 1999) at 70623 n.80 (Concept Release on Market 
Information Fees and Revenues) (quoting S.Rep. No. 94-75, 94th Cong., 1st Sess. 7 (1975) at 94). 
202
  The Commission has expressed, in other contexts, its belief that the regulatory differences between NMS 
Stock ATSs and national securities exchanges may create a competitive imbalance between two 
functionally similar trading centers, and sought to address those concerns by more closely aligning certain 
requirements for NMS Stock ATSs with those of national securities exchanges. See, e.g., ATS-N Adopting 
Release, supra note 159, 83 FR at 38775-76. 

86 
 
open competition trading center is designed to address a concern that qualified auctions, as a new 
mandatory mechanism for execution of segmented orders, should not further exacerbate the 
fragmentation of trading interest in NMS stocks among different trading centers that already 
characterizes the NMS. As discussed in section VII.B.1 below, trading centers for NMS stocks 
include 16 national securities exchanges, 32 NMS Stock ATSs,
203
 6 wholesalers, and more than 
230 other broker-dealers. Allowing only national securities exchanges and NMS Stock ATSs that 
meet the prescribed transparency and volume thresholds to meet the proposed definition of open 
competition trading center is also designed to prevent additional complexity and connectivity 
costs to market participants arising from the introduction of qualified auctions. Such trading 
centers that meet the proposed definition are likely to have already attracted a wide variety of 
market participants with the established connectivity necessary to promote vigorous competition 
in qualified auctions. 
Given the differing regulatory regimes for national securities exchanges and NMS Stock 
ATS that were described in section III above, the elements of the proposed definition of open 
competition trading center vary for national securities exchanges and NMS Stock ATSs. As 
discussed in section IV.D below, paragraph (d) of Proposed Rule 615 would prohibit both 
national securities exchanges and NMS Stock ATSs from operating a qualified auction if they do 
not meet the elements of the definition of an open competition trading center. 
 
As discussed in section III.A above, the Exchange Act sets forth a comprehensive 
regulatory regime for national securities exchanges with a variety of requirements that address, 
                                                
203
  As of Sept. 30, 2022, there were 32 NMS Stock ATSs that had filed an effective Form ATS-N with the 
Commission.  

87 
 
among other things, access and competition. For example, national securities exchanges must 
allow any registered broker-dealer to become a member, subject to the limitations of section 6(c) 
of the Exchange Act, and their rules cannot impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. The Commission has crafted the 
proposed definition of open competition trading center for national securities exchanges having 
taken into account that such exchanges already are subject by statute to this regulatory regime. 
The proposed definition of open competition trading center for national securities 
exchanges has four elements. First, such an exchange would be required to operate a trading 
facility that is an automated trading center and displays automated quotations that are 
disseminated in consolidated market data pursuant to Rule 603(b) of Regulation NMS. The terms 
“automated trading center” and “automated quotation” are defined in Rule 600(b)(8) and Rule 
600(b)(7) of Regulation NMS. Each is an element of the definition of a “protected bid or 
protected offer” in Rule 600(b)(70), which are eligible for protection against trade-throughs 
pursuant to Rule 611 of Regulation NMS. Rule 603(b) provides for the dissemination of 
consolidated market data by SROs. This element of the proposed definition of an open 
competition trading center would help ensure transparency of quotations and fair and efficient 
access to such quotations. It is also designed to ensure that qualified auctions are held on lit 
trading centers, and that the requirements for open competition trading centers are consistent 
between national securities exchanges and NMS Stock ATSs. Also, incorporating the 
requirements for an automated trading center and automated quotations would help ensure that 
such exchange has the necessary technology to run qualified auctions efficiently.  
Second, a national securities exchange would be required to provide transaction reports 
identifying it as the venue of execution that are disseminated in consolidated market data 

88 
 
pursuant to Rule 603(b). Identifying the venue of execution would help market participants 
assess where liquidity for an NMS stock can be found in the NMS, including for qualified 
auctions. Current arrangements for disseminating consolidated market data provide this 
execution venue information for exchanges, but not, as discussed below, for NMS Stock ATSs. 
This requirement is designed to provide a parallel requirement for national securities exchanges 
and NMS Stock ATSs operating qualified auctions, and require the identification of the venue of 
execution by rule for national securities exchanges operating as open competition trading 
centers. 
Third, a national securities exchange would be required to have had an average daily 
share volume of 1.0 percent or more of the aggregate average daily share volume for all NMS 
stocks as reported by an effective transaction reporting plan during at least four of the preceding 
six calendar months.
204
 The proposed 1.0 percent threshold across all NMS stocks, and not 
merely for a single NMS stock, is designed to help ensure that, prior to operating a qualified 
auction, the national securities exchange has attracted a wide range of market participants with 
connectivity to such exchange already in place that would be sufficient to support vigorous 
competition in qualified auctions to provide the best prices for segmented orders. As of 
September 30, 2022, 6 of the 16 national securities exchanges trading NMS stocks reported less 
than 1% of share volume in NMS stocks.
205
 Five of these (Nasdaq BX, Nasdaq Phlx, NYSE 
American, NYSE CHX, and NYSE National), however, were part of exchange groups with other 
national securities exchanges that reported more than 1% of share volume in NMS stocks. Any 
                                                
204
  As discussed in section IV.B.2.b below, NMS Stock ATSs operating as open competition trading centers 
would be subject to the same volume threshold. 
205
  See, e.g., Cboe, U.S. Historical Market Volume Data, available at 
https://cboe.com/us/equities/market_statistics/historical_market_volume/.  

89 
 
exchange that was below the 1% threshold, even if it were part of a group of exchanges with 
some exchanges that meet the threshold, would not meet the definition of an open competition 
trading center and could not operate a qualified auction. The one remaining national securities 
exchange that reported less than 1% of share volume in NMS stocks was LTSE, with less than 
0.01% of share volume in NMS stocks.  
The 1% threshold also would impose a hurdle for a new entrant that wished to register as 
a national securities exchange to become an open competition trading center. In the absence of a 
minimum volume threshold, however, the introduction of qualified auctions as a new trading 
mechanism mandated by regulation could lead to the entry of multiple new national securities 
exchanges intended solely to operate qualified auctions, which could result in either (1) a 
substantial increase of connectivity costs and complexity for market participants to connect to 
every open competition trading center, or (2) a refusal of many market participants to incur such 
costs and complexity, which could detract from the level of competition to provide the best 
prices for segmented orders at open competition trading centers with relatively few connected 
market participants. The 1% threshold is designed to be low enough to help ensure that the core 
competition objective of Proposed Rule 615 is achieved through qualified auctions operated by 
multiple national securities exchanges, while being high enough to demonstrate that a national 
securities exchange has attracted a sufficient level of interest from market participants to avoid 
unduly exacerbating the already substantial level of fragmentation in NMS stocks.  
Given that only a small percentage of marketable orders of individual investors currently 
are routed to national securities exchanges, the competitive opportunity to operate qualified 
auctions that would enable their members and members’ customers to interact with low-cost 
marketable order flow is likely to be an attractive new line of business. If, for example, a single 

90 
 
national securities exchange began operating qualified auctions, it would have a monopoly on the 
business, which would be quite likely to attract multiple additional competitors. It therefore is 
likely that each of the three exchange groups associated with CBOE, Nasdaq and NYSE would 
select one of their national securities exchanges to operate qualified auctions,
206
 and the three 
non-group national securities exchanges that exceed the 1% threshold would operate qualified 
auctions as well. 
Fourth and finally, a national securities exchange would be required to operate pursuant 
to its own rules providing that such exchange will comply with the proposed requirements for 
qualified auctions in paragraph (c) of Proposed Rule 615. This element would help to ensure that 
the operation of a qualified auction would be fully described in the exchange’s rules and that the 
exchange’s compliance with those rules would be subject to the examination and enforcement 
tools in place for exchange rules.
207
 Market participants therefore would be able to reference the 
rules of a national securities exchange to determine whether it operates a qualified auction and 
the material terms of such auctions, including the hours of operation. 
 
As discussed above in section III.B, NMS Stock ATSs are subject to a quite different set 
of statutory and regulatory requirements than national securities exchanges. The definition of 
open competition trading center for NMS Stock ATSs would reflect these differences and 
includes seven elements. 
                                                
206
  See infra note 276 and accompanying text.  
207
  Also, because national securities exchanges must file with the Commission proposed changes to their rules, 
an exchange’s adoption of rules for operating qualified auctions would be subject to public notice, 
comment, and Commission review, as well as Commission oversight. See 15 U.S.C. 78s(b). 

91 
 
First, an NMS Stock ATS would be required to display quotations through an SRO 
display-only facility (currently, the only such facility is FINRA’s ADF) in compliance with Rule 
610(b) of Regulation NMS.
208
 To add an NMS Stock ATS as a new ADF participant, FINRA 
would need to file a proposed rule change that, after an opportunity for public notice and 
comment and review by the Commission, became effective pursuant to section 19(b) of the 
Exchange Act and Rule 19b-4 thereunder.
209
 An NMS Stock ATS, by displaying quotations in 
the ADF that FINRA provides to the SIPs, would have established an ability to disseminate 
information in consolidated market data, as would be required for auction messages under 
Proposed Rule 615(c)(1). In addition, as discussed in section III.B above, Rule 610(b) imposes 
heightened connectivity obligations on an NMS Stock ATS that displays quotations in the ADF, 
which would help assure that market participants have fair and efficient access to any NMS 
Stock ATS that wished to operate a qualified auction. This requirement is not needed for national 
securities exchanges, which, as discussed in section III.A above, are subject to a series of 
Exchange Act access requirements. 
Second, an NMS Stock ATS would be required to operate as an automated trading center 
and display automated quotations that are disseminated in consolidated market data pursuant to 
Rule 603(b) of Regulation NMS. This element matches an element of the proposed definition of 
open competition trading center for national securities exchanges and is proposed for the same 
reason. 
                                                
208
  Under Rule 600(b)(88), the term “SRO display-only facility” means a facility operated by or on behalf of a 
national securities exchange or national securities association that displays quotations in a security, but 
does not execute orders against such quotations or present orders to members for execution. As discussed 
above in section III.B.3, FINRA’s ADF is the only SRO display-only facility, but currently has no 
participating members. 
209
  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37543 (addition of ADF participant would 
constitute a change to a material aspect of FINRA’s facilities that would require the filing of a proposed 
rule change).  

92 
 
Third, an NMS Stock ATS would be required to identify the NMS Stock ATS as the 
venue of execution in transaction reports that are disseminated in consolidated market data 
pursuant to Rule 603(b). As discussed above, this element also would be required for national 
securities exchanges and is designed to help market participants assess where liquidity can be 
found in the NMS for a particular NMS stock. In contrast to the transaction reports of national 
securities exchanges, the transaction reports of off-exchange venues that FINRA currently 
provides for dissemination in consolidated market data do not identify the particular FINRA 
member (including both NMS Stock ATSs and broker-dealers) that reported the trade. For NMS 
Stock ATSs that display quotations in the ADF and operate qualified auctions, full post-trade 
transparency concerning the identity of the NMS Stock ATS that executed trades, including the 
execution of segmented orders in qualified auctions, would be needed to promote fair 
competition among markets and the practicability of broker-dealers determining the best market 
for executing customer orders. For example, real-time dissemination of a transaction report 
indicating that an NMS Stock ATS had executed a segmented order in an NMS stock in a 
qualified auction could assist broker-dealers in identifying where to route segmented orders, as 
well as market participants in identifying where they could interact with segmented orders in 
qualified auctions. Accordingly, if Proposed Rule 615 were adopted, an NMS Stock ATS would 
not be able to meet the definition of an open competition trading center unless the effective NMS 
plans for NMS stocks were conformed to provide for the collection and dissemination of an 
identification of the NMS Stock ATS as the venue of execution in its transaction reports.
 
 

93 
 
Fourth, an NMS Stock ATS would be required to permit any registered broker-dealer to 
become a subscriber,
210
 except those with statutory disqualifications or financial responsibility or 
operational capability concerns. This element parallels the Exchange Act section 6(b)(2) 
requirement that, subject to the provisions of section 6(c), a national securities exchange must 
permit any registered broker-dealer to become a member. It thereby would help ensure that all 
market participants seeking to trade on an NMS Stock ATS, whether they be broker-dealers 
trading proprietarily or investors trading through the services of a broker-dealer, would have 
access to the NMS Stock ATS in the same manner as they have access to national securities 
exchanges. An NMS Stock ATS could not, however, permit a registered broker-dealer subject to 
a statutory disqualification to become a subscriber.
211
 In contrast, national securities exchanges 
may, subject to Commission oversight, allow a registered broker-dealer with a statutory 
disqualification to become a member.
212
 The stricter standard for NMS Stock ATSs is 
appropriate because, as non-SROs, they are not subject to the same level of Commission 
oversight as national securities exchanges.
213
 For example, section 6(c)(2) of the Exchange Act 
                                                
210
  NMS Stock ATSs generally have subscribers, unlike national securities exchanges with self-regulatory 
responsibilities for members. The proposed definition of “subscriber” in Rule 600(b)(100) of Regulation 
NMS is a cross-reference to the definition of “subscriber” in 17 CFR 242.300(b) (Rule 300(b) of 
Regulation ATS). The Regulation ATS definition is being proposed to be used in this context to leverage 
industry experience and help minimize compliance costs. 
211
  Proposed Rule 600(b)(64)(ii)(D)(1). 
212
  Pursuant to Exchange Act section 6(c)(2), a national securities exchange may, and in cases in which 
the Commission, by order, directs as necessary or appropriate in the public interest or for the protection of 
investors shall, deny membership to any registered broker or dealer or natural person associated with a 
registered broker or dealer, and bar from becoming associated with a member any person, who is subject to 
a statutory disqualification. If a national securities exchange knowingly allows a registered broker-dealer 
with a statutory disqualification to become a member, or should have known in the exercise of reasonable 
care, section 6(c)(2) further requires the national securities exchange to file notice with the Commission. 
213
  See, e.g., Regulation ATS Adopting Release, 63 FR at 70858 (discussing when ATS regulation may not be 
appropriate and stating that “it may be necessary for the Commission’s greater oversight authority over 
registered exchanges to apply”). 

94 
 
provides that a national securities exchange must file notice with the Commission not less than 
thirty days prior to admitting any person to membership, if the exchange knew, or in the exercise 
of reasonable care should have known, that such person was subject to a statutory 
disqualification. An NMS Stock ATS is not subject to this notice requirement. An NMS Stock 
ATS could, however, pursuant to written policies and procedures, prohibit any registered broker-
dealer from becoming a subscriber, or impose conditions upon such a subscriber, that did not 
meet specified standards of financial responsibility and operational capability.
214
 This ability to 
prohibit or limit subscribers is patterned on the ability of national securities exchanges under 
section 6(c)(3)(A) of the Exchange Act,
215
 which also permits a national securities exchange to 
deny or condition membership to a broker-dealer that has engaged, and is reasonably likely to 
engage again, in acts or practices inconsistent with just and equitable principles of trade. It would 
not be appropriate for NMS Stock ATSs, as non-SROs, to have this disciplinary authority over 
its subscribers. 
Fifth, an NMS Stock ATS would be required to provide equal access among all 
subscribers of the NMS Stock ATS and the registered broker-dealer of the NMS Stock ATS to 
all services that are related to a qualified auction operated by the NMS Stock ATS under 
Proposed Rule 615(c) and to any continuous order book operated by the NMS Stock ATS. This 
                                                
214
  An NMS Stock ATS must disclose on its Form ATS-N whether it can exclude, in whole or in part, any 
subscriber from the ATS’s services, and if so, it must provide a summary of the conditions for excluding, in 
whole or in part, a subscriber from those services. Form ATS-N, Part III, Item 3.a. Consequently, an NMS 
Stock ATS would be required to disclose its policies and procedures for excluding a broker-dealer on its 
Form ATS-N. Additionally, an NMS Stock ATS that is subject to the fair access requirements of Rule 
301(b)(5) (see supra section III.B.3), must also disclose a list of all persons granted, denied, or limited 
access to the ATS during the quarterly period covered by the report, and, among other things, the nature of 
any denial or limitation of access. Form ATS-R, Instruction 8 and Item 7. 
215
  Pursuant to Exchange Act section 6(c)(3), a national securities exchange may deny membership to, or 
condition the membership of, a registered broker or dealer if such broker or dealer does not meet such 
standards of financial responsibility or operational capability or such broker or dealer or any natural person 
associated with such broker or dealer does not meet such standards of training, experience, and competence 
as are prescribed by the rules of the exchange.  

95 
 
equal access element would require an NMS Stock ATS to provide access on the same terms and 
conditions among all subscribers and the registered broker-dealer of the NMS Stock ATS. It 
therefore would impose a more stringent standard on NMS Stock ATSs than the “no unfair 
discrimination” standard for national securities exchanges under section 6(b)(5) of the Exchange 
Act. The more stringent standard is designed to reflect the different statutory and regulatory 
regimes for NMS Stock ATSs and national securities exchanges and particularly to help achieve 
the goal of equal regulation, as defined in section 3(b)(36) of the Exchange Act and described in 
section III.A above. 
For example, as discussed in section III above, national securities exchanges must 
comply with a variety of statutory requirements that are not applicable to NMS Stock ATSs. 
While they fall within the statutory definition of an exchange, NMS Stock ATSs have been 
exempted from compliance with the statutory requirements for registered national securities 
exchanges if they are registered as a broker-dealer and comply with Regulation ATS. Among 
other things, the rules for all national securities exchanges (1) must be designed affirmatively to 
remove impediments to and perfect the mechanism of a free and open market and an NMS; (2) 
must not be designed to permit unfair discrimination between customers, issuers, or broker-
dealers; and (3) must not impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.
216
  
Each of the foregoing requirements promotes the objective of ensuring fair and efficient 
access to the trading services of national securities exchanges, which is essential for promoting 
fully competitive pricing in qualified auctions, but none applies to NMS Stock ATSs. While they 
                                                
216
  As discussed above, in comparison, national securities exchanges are also required to file proposed rule 
changes to establish or modify trading services, which must be published for public comment. See supra 
notes 68-71, 207, and accompanying text. 

96 
 
must file amendments to Form ATS-N, the amendments are not published for public comment 
and do not require Commission approval prior to implementation. Moreover, the standards for 
access to NMS Stock ATSs are much more limited than those that apply to national securities 
exchanges.
217
 An NMS Stock ATS must comply with the fair access requirement of Rule 
301(b)(5) only for a particular NMS stock in which it exceeds 5% of volume.
218
 As discussed 
above in sections II.B and III.B.3.b, only one NMS Stock ATS discloses on its Form ATS-N that 
it is subject to this fair access requirement for securities that are available for trading on its 
platform. Most importantly, in light of the core order competition requirement of Proposed Rule 
615, Regulation ATS does not impose any requirement on NMS Stock ATSs that is equivalent to 
section 6(b)(8) of the Exchange Act, which prohibits national securities exchanges from 
imposing any burden on competition not necessary or appropriate in furtherance of the 
provisions of the Exchange Act. 
Given that NMS Stock ATSs currently are subject to different requirements for 
promoting fair and efficient access to their trading services than are national securities exchange, 
the Commission believes an NMS Stock ATS should be required to meet a more stringent 
standard to help ensure equal regulation regarding Proposed Rule 615 and sufficient access and 
transparency for a wide range of market participants. Accordingly, an NMS Stock ATS would, if 
it wished to operate a qualified auction under Proposed Rule 615, be required to provide equal 
access to all trading services related to its qualified auctions, as well as to all trading services 
related to a continuous order book operated by the NMS Stock ATS. The extension of equal 
access to services related to a continuous order book is needed because, as discussed in section 
                                                
217
  See, e.g., ATS-N Adopting Release, supra note 159, 83 FR at 38841. 
218
  17 CFR 242.301(b)(5)(i). 

97 
 
IV.C below, such a book would be required to be integrated with qualified auctions.
219
 The 
proposed equal access requirement is designed to help ensure a level playing field regarding 
Proposed Rule 615 for competition among national securities exchanges and NMS Stock ATSs 
and thereby promote the Exchange Act principle of equal regulation. Specifically, consistent 
with the NMS objective in section 11A(1)(C)(ii) of promoting fair competition among markets, 
neither type of trading center should have a significant regulatory advantage for operating 
qualified auctions that could drive volume in such auctions to either type, whether it be national 
securities exchanges or NMS Stock ATSs. 
Sixth, an NMS Stock ATS would be required to have had an average daily share volume 
of 1.0 percent or more of the aggregate average daily share volume for NMS stocks as reported 
by an effective transaction reporting plan during at least four of the preceding six calendar 
months.
220
 The methodology for this calculation would be the same as prescribed for application 
of the fair access requirements of ATSs by Rule 301(b)(5)(i)(A) of Regulation ATS, except that 
the numerator and denominator in the percent calculation is volume in all NMS stocks, rather 
than in any particular NMS stock. As with the fair access requirement, the proposed 
methodology is designed to encompass NMS Stock ATSs that have demonstrated a consistent 
                                                
219
  As discussed below in section IV.C.5, a displayed order resting on the continuous order book would have 
priority over an equally-priced auction response, and an undisplayed order resting on the continuous order 
books would have priority if it provided a better price for a segmented orders than an auction response. 
220
  A 1% volume threshold in NMS stocks is also one of the thresholds used to determine whether an NMS 
Stock ATS is an SCI entity subject to the requirements of 17 CFR 242.1000 through 242.1007 (“Regulation 
SCI”). See 17 CFR 242.1000 paragraph (1)(ii) of “SCI alternative trading system or SCI ATS” definition, 
and “SCI entity” definition. Among other things, each SCI entity is required to comply with the capacity, 
integrity, resiliency, availability, and security requirements of Rule 1001 of Regulation SCI. In adopting a 
volume threshold for NMS Stock ATSs for purposes of Regulation SCI, the Commission recognized that 
certain ATSs play an important role in today’s securities markets, and that higher volume ATSs 
collectively represent a significant source of liquidity for NMS stocks, with some ATSs having similar and, 
in some cases, greater trading volume than some national securities exchanges. See Securities Exchange 
Act Release No. (Nov. 19, 2014), 73639 79 FR 72252, 72262 (Dec. 5, 2014) (adopting Regulation SCI and 
related amendments to Regulation ATS). 

98 
 
historical level of volume. To promote fair competition and equal regulation, this proposed 
element is the same as that proposed for national securities exchanges and is proposed for the 
same primary reasons — (1) to help ensure that an NMS Stock ATS has attracted a wide range of 
market participants with connectivity already in place that would be sufficient to support 
vigorous competition in qualified auctions to provide the best prices for segmented orders; and 
(2) to avoid exacerbating the costs and complexity of fragmentation that already exists of trading 
interest in NMS stocks.  
Seventh and finally, an NMS Stock ATS would be required to operate pursuant to an 
effective Form ATS-N that sets forth the operations of the qualified auction and compliance by 
the NMS Stock ATS with the requirements of Proposed Rule 615(c) for a qualified auction, as 
well as with all of the other elements of the definition of open competition trading center for 
NMS Stock ATSs that are discussed above. This proposed disclosure element is designed to 
ensure that an NMS Stock ATS fully discloses material operating practices to the public on Form 
ATS-N, and that these operating practices are subject to the examination and enforcement tools 
in place for NMS Stock ATSs. Market participants therefore would be able to reference the Form 
ATS-N of an NMS Stock ATS to determine whether it operates a qualified auction and the 
material terms of such auctions, including the hours of operation. 
 
The proposed definition of restricted competition trading center
221
 encompasses any 
trading center that is neither an open competition trading center nor a national securities 
exchange. Some national securities exchanges may not meet all of the elements of the proposed 
definition of an open competition trading center, such as the minimum 1% volume threshold. 
                                                
221
  Proposed Rule 600(b)(87). 

99 
 
Nevertheless, all national securities exchanges, as well as open competition trading centers, 
would be excluded from the definition of restricted competition trading center because both these 
types of trading centers either are not permitted by the Exchange Act (in the case of all national 
securities exchanges) or would not be permitted by Proposed Rule 615(d)(1) and its 
incorporation of the proposed definition of an open competition trading center (in the case of 
NMS Stock ATSs) to unfairly restrict access to their platforms.  
Currently, no NMS Stock ATS displays quotations in the ADF. Unless this changes,
222
 no 
NMS Stock ATS would meet the proposed definition of an open competition trading center, and 
therefore all would be restricted competition trading centers. The three other types of broker-
dealer trading centers are exchange market makers, OTC market makers (including wholesalers), 
and internalizing broker-dealers.
223
 These broker-dealers, as stated in section IV.B.2 above, 
could not operate a qualified auction without falling within the Exchange Act definition of 
exchange.
224
 Unless such a broker-dealer became an NMS Stock ATS and met all of the 
elements of the proposed definition of an open competition trading center, it would fall within 
the definition of a restricted competition trading center and would be subject to the order 
competition requirements of Proposed Rule 615(a). 
 
As discussed in section IV.E below, originating brokers would perform several vital 
functions under Proposed Rule 615, including making the original determination that an order 
falls within the definition of a segmented order and identifying the order as such when routed for 
                                                
222
  See supra note 208. 
223
  See supra section II.B.  
224
  See supra note 200 and accompanying text. 

100 
 
execution. The proposed definition of originating broker
225
 reflects these important functions. It 
would cover any broker with responsibility for handling a customer account, including, but not 
limited to, opening and monitoring the customer account and accepting and transmitting orders 
for the customer account.
226
 As such and as discussed further below, there may be more than one 
originating broker for a particular customer account. 
The Commission understands that broker business practices can vary widely in terms of 
how customer accounts are handled. Some brokers may perform this entire function internally, 
while others may work with additional brokers to handle customer orders. A single broker that is 
solely responsible for the handling of a customer account would be an originating broker. To the 
extent that multiple brokers perform different functions for a customer account (sometimes 
referred to as “introducing brokers,” “carrying brokers,” or “clearing brokers”), each such broker 
would be an originating broker. In addition, as discussed further in section IV.E below, different 
types of brokers enter into agreements with one another to allocate certain responsibilities with 
respect to their handling of customer accounts.
227
 As discussed in section IV.C.1 below, 
                                                
225
  Proposed Rule 600(b)(69). 
226
  The broker-dealer functions specifically enumerated in the proposed definition of originating broker are 
included in the list of responsibilities that FINRA requires its members to allocate for accounts that are 
carried on an omnibus or fully disclosed basis. See infra note 227. See also Securities Investment Advisers 
Act Release No. 5429 (June 5, 2019), 84 FR 33681 (July 12, 2019) (clarifying the scope of the broker-
dealer exclusion from the definition of “investment adviser” under the Investment Advisers Act of 1940 for 
broker-dealers whose performance of advisory services is “solely incidental” to the conduct of its business 
as a broker-dealer and for which the broker-dealer “receives no special compensation”); and Regulation BI 
Adopting Release, supra note 187, at 33358 (discussing disclosure requirements for broker-dealers related 
to “monitoring the performance of the retail customer’s account”). 
227
  FINRA Rule 4311 addresses the allocation of responsibilities between members for accounts that are 
carried on an omnibus or fully disclosed basis. FINRA Rule 4311(c)(1) specifies the minimum 
requirements for carrying agreements in which accounts are carried on a fully disclosed basis. FINRA Rule 
4311(c)(1) (“Each carrying agreement in which accounts are to be carried on a fully disclosed basis shall 
specify the responsibilities of each party to the agreement, including at a minimum the allocation of the 
responsibilities set forth in paragraphs (c)(1)(A) through (I) and (c)(2) of this Rule.”); FINRA Rules 
4311(c)(1)(A) through (I) (“(A) Opening and approving accounts. (B) Acceptance of orders. (C) 
Transmission of orders for execution. (D) Execution of orders. (E) Extension of credit. (F) Receipt and 
delivery of funds and securities. (G) Preparation and transmission of confirmations. (H) Maintenance of 

101 
 
paragraph (c)(1)(ii) of Proposed Rule 615 specifies that, if multiple brokers for a segmented 
order fall within the proposed definition of originating broker, the broker responsible for 
approving the opening of accounts for customers (commonly performed by an introducing 
broker) would be required to be identified in auction messages under Proposed Rule 615(c)(1). 
 
Paragraph (b) of Proposed Rule 615 sets forth five exceptions from the order competition 
requirement of paragraph (a). The first exception is for a segmented order that is received and 
executed by a restricted competition trading center during a time period when no open 
competition trading center is operating a qualified auction for the segmented order. This 
exception would be necessary to enable segmented orders to trade during such a time period, 
since compliance with Proposed Rule 615 would otherwise be impossible if no qualified auction 
were available. Proposed Rule 615 does not specify any particular time period during which an 
open competition trading center must operate a qualified auction. Given, however, the 
requirement in paragraph (c)(3) of Proposed Rule 615 that auction messages must be provided 
for dissemination in consolidated market data,
228
 a qualified auction could not operate at any 
time when the facilities for disseminating consolidated market data were not operating. As 
discussed in section III.B above, such facilities currently are operated by the SIPs. The current 
SIP hours of operation are from 4 a.m. to 8 p.m. eastern time on trading days for the U.S. equity 
                                                
books and records. (I) Monitoring of accounts.”); FINRA Rule 4311(c)(2) (prescribing the requirements for 
how each carrying agreement in which accounts are to be carried on a fully disclosed basis must allocate 
responsibility for the safeguarding of funds and securities, and the preparing and transmitting of statements 
of accounts to customers). FINRA Rules are available at https://www.finra.org/rules-
guidance/rulebooks/finra-rules. 
228
  The phrase “provided for dissemination in consolidated market data” reflects that, while national securities 
exchanges send quotation and transaction information directly to the SIPs, NMS Stock ATSs would 
provide such information to the ADF operated by FINRA, which would send the information to the SIPs. 

102 
 
markets. While the trade-through restrictions of Rule 611 of Regulation NMS apply only during 
regular trading hours of 9:30 a.m. to 4:00 p.m. eastern time,
229
 the order competition requirement 
of Proposed Rule 615(a) is needed for additional hours given the enhanced risks for individual 
investors. Unlike Rule 611, Proposed Rule 615 is narrowly targeted on protecting the interests of 
individual investors and the risks they face when using marketable orders to trade in NMS 
stocks. These include the risks of lower liquidity and wider spreads that are particularly 
significant in after-hours trading and that qualified auctions could address effectively.
230
  
The second exception from Proposed Rule 615 would be for large orders with a market 
value of at least $200,000 calculated with reference to the NBBO midpoint when the order is 
received by a restricted competition trading center. This exception is designed to address the 
heightened liquidity need of large orders that often may be more appropriately addressed outside 
of a qualified auction. The $200,000 threshold is the same dollar amount as in other Regulation 
NMS rules to exclude orders or trades that are so large as to warrant different treatment than 
smaller orders.
231
 A specific methodology for calculating market value (NBBO midpoint at time 
of order receipt) is prescribed to provide additional clarity for restricted competition trading 
centers on complying with Proposed Rule 615 that should be readily implementable when 
qualified auctions are operating. The $200,000 threshold is designed to except orders that may be 
difficult to execute efficiently in qualified auctions at prices that generally would be at or within 
the NBBO. While these large orders are eligible for an exception, they still would meet the 
                                                
229
  See Rule 600(b)(94) of Regulation NMS (limiting definition of trade-through to regular trading hours); 
Rule 600(b)(77) of Regulation NMS (defining regular trading hours). 
230
  See FINRA Rule 2265 (Extended Hours Trading Risk Disclosure) (requiring disclosure to customers of the 
risks of extended hours trading, including the risks of lower liquidity and wider spreads). 
231
  See, e.g., Rule 604(b)(4) of Regulation NMS (providing an exception for orders of block size from required 
limit order display) and Rule 600(b)(12) of Regulation NMS (defining “block size” as, in part, an order for 
a quantity of stock having a market value of at least $200,000). 

103 
 
definition of a “segmented order” and could be routed for execution in a qualified auction if the 
broker-dealer handling the order determines that such routing would promote best execution of 
the segmented order.  
The third exception, provided by Proposed Rule 615(b)(3), is for segmented orders that 
are executed by a restricted competition trading center at a price that is equal to the NBBO 
midpoint or more favorable for the segmented order (i.e., the NBBO midpoint or lower for 
segmented orders to buy or the NBBO midpoint or higher for segmented orders to sell), as 
determined with reference to the NBBO at the time the segmented order was received by the 
restricted competition trading center. For trades at these prices, an investor would either be 
paying no spread (with a price at the NBBO midpoint) or earning a spread (with a buy order 
executed at a price lower than the NBBO midpoint and a sell order executed at a price higher 
than the NBBO midpoint). In such circumstances, the submission of a segmented order to a 
qualified auction would not be necessary to obtain a competitive price for such order. 
The fourth exception, provided by Proposed Rule 615(b)(4), is for segmented orders that 
are limit orders with a limit price selected by the customer that is equal to or more favorable for 
the segmented order than the midpoint of the national best bid and national best offer when the 
segmented order is received by the restricted competition trading center. This exception is 
designed so that when the customer has selected a limit price that will result in a favorable 
execution, submission of the segmented order to a qualified auction would not be necessary to 
obtain a competitive price. This exception would work in conjunction with the third exception 
for executions of segmented orders at a price equal to the midpoint or more favorable to the 
segmented order. As discussed above in section IV.B.1, this exception would not apply to 
beyond-the-midpoint non-marketable limit orders. 

104 
 
Finally, the fifth exception, provided by Proposed Rule 615(b)(5), is for the fractional 
share component of a segmented order. Fractional share orders typically are submitted by 
individual investors in dollar sizes rather than share sizes, and often are referred to as “cash 
orders.” If the dollar size of an order is less than the share price for an NMS stock (such as a 
$200 order for a $450 stock), the size of the order will be less than one share. If the dollar size of 
the order is greater than the share price for an NMS stock (such as a $1000 order for a $450 
stock), the size of the order will be greater than one share and have a fractional share component. 
While these orders for less than one share and orders for more than one share or with a fractional 
share component would fall within the definition of segmented order, they raise practical 
difficulties for executing in qualified auctions because currently, most trading centers, including 
all national securities exchanges, only accept orders with whole share sizes and do not accept 
orders for less than one share or orders with a fractional share component. The Commission is 
concerned that applying the requirements of Proposed Rule 615 to orders for less than one share 
and orders for more than one share with a fractional component would interfere with broker-
dealers willingness to accept such customer orders. For these reasons, Proposed Rule 615 would 
provide an exception for orders less than one share and the fractional component of a segmented 
order, if no qualified auction is available for such orders. Specifically, the rule would provide an 
exception if the segmented order is received and executed by the restricted competition trading 
center during a time period when no open competition trading center is operating a qualified 
auction for the segmented order that accepts orders that are not entirely in whole shares, and the 
customer selected a size for a segmented order that is not entirely in whole shares of an NMS 
stock, in which case any portion of such segmented order that is less than one whole share of the 
NMS stock, and only such portion, would not be subject to the order competition requirement of 

105 
 
Proposed Rule 615(a).
232
 As is the case with each of the exceptions, a broker-dealer’s 
responsibilities with respect to best execution of a segmented order, including the fractional 
share portion of a segmented order, would remain in effect. The exception would only address 
whether the segmented order, or fractional portion thereof, is required to be exposed in a 
qualified auction. 
Proposed Rule 615 does not provide an exception for orders directed by a customer to a 
particular restricted competition trading center for execution. Currently, 98% of the marketable 
orders of individual investors routed to wholesalers are not directed to any particular trading 
center, with the investor instead relying on their broker-dealer, and their broker-dealer’s best 
execution responsibilities, for order routing.
233
 Moreover, because the rule would only apply to 
the internalization of segmented orders by a restricted competition trading center, customers 
could continue to direct segmented orders to any trading center that was not a restricted 
competition trading center (i.e., an open competition trading center or national securities 
exchange, which are excluded from the definition of restricted competition trading center) 
without their orders being subject to the requirement for exposure in a qualified auction. 
Segmented orders directed to a restricted competition trading center would need to comply with 
Proposed Rule 615 and, absent an exception, be exposed to competition in a qualified auction. 
Any delay would be limited, however, to a very short, sub-second time period (as specified in 
Proposed Rule 615(c)(2)) and would give individual investors an opportunity to obtain fully 
competitive prices for their segmented order, as well as give other market participants, including 
institutional investors, an opportunity to interact with segmented orders.  
                                                
232
  Proposed Rule 615(b)(5). 
233
  See infra section VII.B.2.a for a discussion of the routing of individual investor orders in today’s market 
structure. 

106 
 
C. Qualified Auction Requirements 
The term “qualified auction” is proposed to be defined in Proposed Rule 600(b) of 
Regulation NMS as an auction that is operated by an open competition trading center pursuant to 
paragraph (c) of Proposed Rule 615.
234
 Paragraph (c), in turn, sets forth a series of specific 
requirements for qualified auctions, which could be operated only by national securities 
exchanges and NMS Stock ATSs that meet the definition of an open competition trading center. 
Given that routing segmented orders to qualified auctions would be mandated by rule in some 
contexts, these auctions should be operated in a manner that primarily promotes the core order 
competition objective of Proposed Rule 615.
235
 The proposed requirements for qualified auctions 
are designed to achieve this competition objective. 
 
Proposed Rule 615(c)(1) specifies the requirements for an auction message that 
announces the initiation of a qualified auction for a segmented order. The first is that the 
message must be provided for dissemination in consolidated market data pursuant to Rule 603(b) 
of Regulation NMS. As stated in section III.B.1 above, the Commission has adopted 
amendments to Regulation NMS that expand the information required to be included in 
consolidated market data, which would include auction information.
236
 Because these 
                                                
234
  Proposed Rule 600(b)(81). 
235
  A number of exchanges, for example, currently operate auctions for orders in listed options. See, e.g., 
CBOE Rule 5.37 (Automated Improvement Mechanism (“AIM” or “AIM Auction”)). These auctions are 
not mandated by Commission rule, and trading in listed options varies in important respects from trading in 
NMS stocks. For example, there are far more series of listed options than NMS stocks, which contributes to 
a market structure in which market makers dominate liquidity provision (a “quote-driven” market), rather 
than the “order-driven” market that characterizes NMS stocks. Proposed Rule 615 is designed to achieve 
policy objectives that are particular to mandatory auctions in NMS stocks. See also supra section I 
(discussing the difference between the markets for listed options and NMS stocks).  
236
  Rule 600(b)(19) defines consolidated market data to include, among other things, core data, consolidated 
across all national securities exchanges and national securities associations. Rule 600(b)(21) defines core 

107 
 
amendments have not yet been implemented, if Proposed Rule 615 is adopted, the effective NMS 
plans for NMS stocks would need to be conformed to provide for the collection and 
dissemination of auction messages pursuant to Proposed Rule 615(c)(1)(i). The wide 
dissemination of qualified auction messages in consolidated market data would help ensure the 
broadest possible participation of market participants in qualified auctions and the best prices for 
segmented orders. 
The phrase “provided for dissemination in consolidated market data” reflects that, while 
national securities exchanges send quotation and transaction information directly to the SIPs, 
NMS Stock ATSs would provide such information to the ADF operated by FINRA, which would 
send the information to the SIPs.
237
 The primary purpose of an auction message is to promote 
competition by soliciting potential auction responses from a wide spectrum of market 
participants. The inclusion of the auction messages in consolidated market data, rather than being 
limited to the proprietary data feed of a national securities exchange or NMS Stock ATS, is 
designed to help achieve this purpose. In addition, wide dissemination of auction messages 
would help address some of the problems raised by the current level of fragmented trading 
interest in NMS stocks. For example, market participants that wish to interact with segmented 
orders would not need to predict the trading center to which segmented orders are likely to be 
routed and post a resting order in that trading center in advance of the arrival of a segmented 
order. Rather, market participants would be able to direct their auction responses to the particular 
open competition trading center that disseminated the auction message signaling that a 
segmented order was available for interaction. 
                                                
data to include, among other things, auction information with respect to quotations for, and transactions in, 
NMS stocks. 
237
  See supra section III.B.1 (discussing rules addressing dissemination of consolidated market data). 

108 
 
Qualified auctions therefore may be useful, for example, to institutional investors that 
currently seek to trade with marketable order flow using resting undisplayed orders, often priced 
at the NBBO midpoint, that are intended to minimize information leakage concerning the 
typically large trading interest of institutional investors. Today, these market participants must 
select one or more trading centers on which to rest their orders based on predictions of the 
frequency and level of adverse selection costs of the marketable order flow with which they may 
interact at a particular trading center. With qualified auctions, such market participants would 
know the specific open competition trading centers where they could interact directly with 
segmented order flow that had low adverse selection costs. The Commission anticipates that 
qualified auctions thereby could benefit investors on both sides of the trades in qualified auctions 
— segmented orders could receive highly favorable prices (such as a “no spread” execution at 
the NBBO midpoint) and institutional investors would have a much greater opportunity to 
interact with the low-cost order flow of individual investors than they have today.
238
 Information 
leakage would be limited because, as discussed below, an institutional investor’s auction 
response would not be displayed, and, if the institutional investor traded in a qualified auction, 
the only displayed information would be a transaction report that maintained the anonymity of 
the parties to the transaction. 
Proposed Rule 615(c)(1) also specifies the information content of an auction message, 
including disclosure that the auction is for a segmented order, the identity of the open 
competition trading center, NMS stock symbol, side (buy or sell), size, limit price, and identity 
                                                
238
  In addition to participating in qualified auctions by submitting auction responses, institutional investors 
could interact with segmented orders by submitting orders, including undisplayed NBBO midpoint orders, 
to the continuous order book of an open competition trading center that operates qualified auctions. As 
discussed below in section IV.C.5, any better-priced order resting on the continuous order book would have 
priority over lesser-priced auction responses to trade with segmented orders in a qualified auction.  

109 
 
of the originating broker for the segmented order. For auction responders, all of this information 
is necessary or useful in deciding whether to respond to the auction message and, if so, at what 
price. The fact that the order is a segmented order would indicate that the order is likely to have 
low adverse selection costs compared to other marketable order flow, such as orders routed to the 
continuous order books of national securities exchanges. Moreover, the identity of the 
originating broker likely would convey additional information concerning the level of adverse 
selection costs that an auction responder could expect. Data analysis indicates that adverse 
selection costs can vary substantially among different retail brokers.
239
 Knowing the identity of 
the originating broker would therefore be a significant piece of information in pricing an auction 
response. Accordingly, if only some market participants knew the identity of the originating 
broker, other potential responders may not participate due to fear of the winner’s curse (winning 
the least advantageous auctions and losing the most advantageous auctions because of an 
information disadvantage). Limited participation could harm the competitiveness of qualified 
auctions.  
Paragraph (c)(1)(ii) of Proposed Rule 615 specifies that, if multiple broker-dealers fall 
within the proposed definition of originating broker, it would be the broker-dealer responsible for 
approving the opening of accounts with customers
240
 (commonly performed by an introducing 
broker) that would be required to be identified by an open competition trading center in auction 
messages under Proposed Rule 615(c)(1). The business model of broker-dealers (including the 
types of services they offer and the nature of the commissions and fees they charge) determines 
the types of customers that broker-dealers will attract, and different business models may be 
                                                
239
  Table 12, infra, section VII.B.5. 
240
  See, e.g., FINRA Rule 4311(c)(1)(A); supra note 227 and accompanying text. 

110 
 
associated with lower or higher adverse selection costs. As between an introducing broker and a 
clearing broker, it is the introducing broker that typically determines the business model for 
attracting customers. For this reason, knowing the identity of the introducing broker associated 
with a segmented order (i.e., the broker typically with responsibility for approving the opening of 
the customer account) likely would be more important for market participants in assessing the 
potential adverse selection costs of trading with a segmented order than knowing the identity of 
other broker-dealers that may handle the segmented order during its lifecycle. Because the types 
of orders that would meet the definition of “segmented order” are generally associated with 
lower adverse selection costs,
241
 most originating brokers with responsibility for approving the 
opening of customer accounts likely would choose to have their identity disclosed in auction 
message. 
The Commission recognizes, however, that some originating brokers or their customers 
may not wish to have the identity of the originating broker for a segmented order publicly 
disseminated. Proposed Rule 615(c)(1)(iii) therefore would provide a choice for the originating 
broker. It could either allow its identity to be disclosed in an auction message or it could 
withhold this information by certifying that it has established, maintained, and enforced written 
policies and procedures reasonably designed to assure that its identity will not be disclosed, 
directly or indirectly, to any person that potentially could participate in the qualified auction or 
otherwise trade with the segmented order. If the originating broker makes this certification, 
paragraph (c)(1)(iii) would prohibit disclosure of the identity of the originating broker in the 
auction message.
242
 Proposed paragraph (c)(1)(iii) would also require that the certification be 
                                                
241
  See infra section VII.B.2 discussing why certain orders are segmented because they are low-cost flow. 
242
  See infra section IV.E discussing potential procedures for an originating broker to assure that its identity 
will not be disclosed. 

111 
 
communicated to the open competition trading center conducting the auction. In addition, 
proposed paragraph (e)(3), discussed in section IV.E below, specifies the requirements for an 
originating broker that makes the certification, and proposed paragraph (f)(2), discussed in 
section IV.F below, specifies certain trading prohibitions for any broker-dealer with knowledge 
of where a segmented order is to be routed for execution. The overriding purpose of these 
proposed requirements is to help ensure fair competition among auction responders and persons 
that could otherwise trade with the segmented order. If one or more auction responders or 
persons that could otherwise trade with the segmented order knew the identity of the originating 
broker, but others did not, those that knew would have a substantial information advantage in 
pricing their orders over those that did not. The proposed requirements would give originating 
brokers a choice on whether to disclose their identity, while at the same time promoting fair 
competition among auction responders and persons that could otherwise trade with the 
segmented order, both when such identity is disclosed and when it is not. Under Proposed Rule 
615(c)(1), (e)(3), and (f)(2), either all auction responders and persons that could otherwise trade 
with the segmented order would know the identity of the originating broker, or no auction 
responder or person that could otherwise trade with the segmented order would be permitted to 
know the identity of the originating broker. In either event, the fairness of qualified auctions 
would not be impacted. 
 
Proposed Rule 615(c)(2) specifies that the time period for a qualified auction must be no 
shorter than 100 milliseconds (1/10
th
 of a second) and no longer than 300 milliseconds (3/10
ths
 of 
a second) after an auction message is provided for dissemination in consolidated market data. 
The intent of these limits is to help ensure that a wide variety of market participants will have the 
technological capacity to submit responses to fast automated auctions, while also helping to 

112 
 
assure that the execution of segmented orders is not unduly delayed. Several national securities 
exchanges operate auctions that fall within these time periods, which indicates that the time 
periods are workable with technologies that currently are available to market participants (i.e., 
the fact that multiple national securities exchanges already operate auctions in these time frames 
indicates that market participants generally would be able to submit auction responses within the 
specified time periods).
243
 The Commission anticipates individual investors would manually 
submit to their brokers the great majority of segmented orders. Proposing to limit the auction 
length to no more than 300 milliseconds is designed to promote competition to obtain the best 
prices for segmented orders, but without a delay long enough to be inconsistent with an 
investor’s intent to trade immediately at the best available prices.  
Paragraph (c)(2) would further require that auction responses remain undisplayed during 
the time frame of the auction and not be disseminated thereafter. This proposed requirement is 
designed to prevent the market participants with the fastest systems from obtaining an advantage 
by observing the pricing of auction responses and submitting their auction responses near the end 
of the time period for the auction. It also is designed to prevent information leakage, both during 
auctions themselves and by analyzing historical auction data, concerning the trading interest of 
market participants, particularly institutional investors, that submit auction responses. 
 
Under Proposed Rule 615(c)(3), segmented orders and auction responses must be priced 
in an increment of no less than $0.001 (or 0.1 cent) if their prices are $1.00 or more per share, in 
                                                
243
  See, e.g., Securities Exchange Act Release No. 91423 (Mar. 26, 2021), 86 FR 17230 (Apr. 1, 2021) (SR-
CboeBYX-2020-021) (order approving Cboe BYX’s proposed rule change for periodic auctions in NMS 
stocks with a 100 millisecond auction period); Nasdaq PHLX Rule 3, section 13(b)(1)(D) (providing that 
the time period for PHLX’s Price Improvement XL Mechanism (“PIXL”) auctions in listed options will be 
no less than 100 milliseconds and no more than one second). 

113 
 
an increment of no less than $0.0001 (or 0.01 cent) if their prices are less than $1.00 per share, or 
at the midpoint of the NBBO.  
These proposed increments are designed to balance the objectives of being sufficiently 
narrow to allow frequent price improvement for segmented orders (the wider the pricing 
increment, the greater the minimum amount of price improvement that is required, which could 
limit the frequency of price improvement), while being sufficiently wide to prevent market 
participants from attempting to gain execution priority by pricing their auction responses in very 
small increments. An analysis of current wholesaler trading in NMS stocks indicates that 18.64% 
of the price improved shares of wholesaler principal transactions received price improvement of 
less than 0.1 cent.
244
 Accordingly, the 0.1 cent price increment for qualified auctions would 
allow much of the existing price improvement to continue in qualified auctions. Moreover, as 
discussed in section IV.C.5 below, one of the prescribed execution priority requirements for 
qualified auctions in paragraph (c)(5) of Proposed Rule 615 is that the auction responses of 
customers, including institutional investors, would have priority over the auction responses of 
broker-dealers at the same price, thereby furthering the NMS objective of promoting direct 
interaction of investor orders without the participation of a dealer. A smaller pricing increment 
(such as 0.05 cent per share (or 1/20
th
 of a cent per share) would allow more price improvement, 
but also would double the number of increments at which auction responses could be priced, 
which would enable execution priority advantages at the larger number of increments. The 
objective of promoting direct interaction of investor orders could be undermined if broker-
dealers with the most sophisticated algorithmic trading strategies could submit auction responses 
with very small pricing increments designed to obtain execution priority. 
                                                
244
  Table 7, infra, section VII.B.4. 

114 
 
 
Proposed Rule 615(c)(4) sets forth a number of requirements that would govern the fees 
and rebates of open competition trading centers with respect to qualified auctions.
245
 In general, 
these requirements are designed to provide reasonable compensation for operating a qualified 
auction, while maximizing an opportunity for competitive forces to generate the best possible 
prices for segmented orders. Qualified auctions would be a new business line for open 
competition trading centers (both national securities exchanges and NMS Stock ATSs), which 
would provide them an opportunity to compete to attract the marketable orders of individual 
investors that, as discussed in section VII.B.2 below, are mostly routed to, and executed by, 
wholesalers in the current market structure. Accordingly, the proposed requirements for fees and 
rebates are designed to provide sufficient financial incentives for open competition trading 
centers to operate qualified auctions, but the primary objective of such requirements is to 
promote the regulatory objectives of Proposed Rule 615 — better prices for individual investors 
and an enhanced opportunity for investors to interact directly with the marketable orders of 
individual investors. 
First, no fee could be charged for submission or execution of a segmented order, or for 
submission of an auction response. Second, the fee for execution of an auction response could 
not exceed $0.0005 per share for auction responses priced at $1.00 per share or more, could not 
exceed 0.05% of the auction response price per share for auction responses priced at less than 
$1.00 per share, and otherwise would have to be the same rate for executed auction responses in 
all auctions. Third and similarly, any rebate for the submission or execution of a segmented order 
                                                
245
  The Commission also is proposing to amend rules addressing fees and rebates more generally. See 
Minimum Pricing Increments Proposal, supra note 98. The Commission encourages commenters to review 
that proposal to determine whether it might affect their comments on this proposing release. 

115 
 
or for the submission or execution of an auction response could not exceed $0.0005 per share for 
segmented orders or auction responses priced at $1.00 per share or more, cannot exceed 0.05% 
of the segmented order or auction response price per share for segmented orders or auction 
responses priced at less than $1.00 per share, and otherwise must be the same rate for segmented 
orders in all auctions and must be the same rate for auction responses in all auctions. 
Proposed Rule 615 would prohibit fees for the submission or execution of segmented 
orders in a qualified auction. As discussed in section II above, the trading economics of 
executing segmented orders, particularly their low adverse selection costs, has led to a market 
structure where restricted competition trading centers generally do not charge fees to the broker-
dealers that route such orders and, indeed, often offer PFOF to retail brokers in return for routing 
such orders. With Proposed Rule 615, routing segmented orders to qualified auctions would 
often, absent an exception, be mandated by rule — a restricted competition trading center 
generally would be prohibited from executing a segmented order internally without first routing 
such order to a qualified auction. The Commission believes that broker-dealer compliance with a 
new rule requiring the routing of segmented orders to qualified auctions in certain circumstances 
should not lead to the imposition of fees by trading centers on broker-dealers that are not charged 
for the execution of such orders today. Instead, as discussed below, open competition trading 
centers could fund their operation of qualified auctions by imposing fees on auction responses 
that execute against segmented orders. In this respect, the market participants that benefit from 
the opportunity to trade with segmented orders, with their low adverse selection costs, would pay 
the open competition trading center for that trading service.  
With respect to auction responses, no fee could be charged for the submission of an 
auction response that is not executed. Such a practice potentially could be used to deter a wide 

116 
 
range of market participants from participating in qualified auctions and thereby dampen 
competition to provide the best prices for segmented orders. Fees could be charged for executed 
auction responses, consistent with the cap on such fees, which, for most NMS stocks, would be 
0.05 cent per share, also known as 5 “mils.” The proposed 5 mils cap on fees is designed to be 
sufficient to provide reasonable compensation to an open competition trading center. For 
example, an analysis of financial data for national securities exchanges indicates that average 
total net capture (the difference between fees levied and rebates paid) for such exchanges is 
currently around 4 mils for all trading types.
246
 Accordingly, the proposed 5 mils fee cap would 
provide a revenue source to fund qualified auctions that is consistent with their revenue to fund 
their other trading services, particularly their services during continuous trading hours.
247
 In 
addition, pursuant to Proposed Rule 615(c)(4), any fee charged for execution of an auction 
response must be the same rate for all auctions (i.e., an open competition trading center would 
not be permitted to charge different fees for auctions for different securities, nor would an open 
competition trading center be permitted to charge different fees to different market participants 
or different classes of market participants, such as preferential fees based on volume). This 
proposed uniform rate for fees is designed to promote a level playing field among all potential 
market participants that may wish to trade with segmented orders. It would, for example, prohibit 
any volume discount that could give the largest participants an economic advantage in pricing 
their auction responses compared to other market participants. The uniform rate also would 
                                                
246
  See infra section VII.C.1.a (discussing effects of 5 mils cap on competition to supply liquidity to the 
marketable orders of individual investors). 
247
  Id. (net capture for the executions of orders during continuous trading hours (but not opening or closing 
auctions) priced at $1.00 per share or greater is likely close to 2 mils). 

117 
 
prevent a fee discount for the executed auction response of a broker-dealer that routed the 
segmented order to the qualified auction. 
The proposed requirements for rebates mirror the requirements for fees in terms of the 5 
mils cap and the requirement of a uniform rate for all auctions. In particular, rebates could not 
exceed the maximum fee for qualified auctions. The equivalent proposed 5 mils cap on rebates is 
designed to limit cross-subsidization of qualified auctions by the largest open competition 
trading centers in ways that would not be available to smaller competitors, because larger 
competitors may have more or larger alternative revenue sources. The uniform rate of rebates for 
all auctions is designed, as with the uniform rate of fees, to level the playing field among larger 
and smaller broker-dealers. The proposed requirements for rebates differ from those for fees, 
however, in that open competition trading centers would have discretion on whether to offer 
rebates for the submission of segmented orders and of auction responses, as well as the execution 
of segmented orders and of auction responses. If such rebates were offered, however, they would 
have to be a uniform rate among all auctions to promote a level playing field and fair 
competition among broker-dealers and among auction responders. 
 
Proposed Rule 615(c)(5) would specify five requirements for the execution priority of 
auction responses and orders resting on the continuous order book of an open competition 
trading center, which can be divided into three categories. The first two would specify 
affirmative requirements for how priority among auction responses must be handled; the second 
two would specify negative requirements for how priority among auction responses cannot be 
handled; and the fifth requirement would address how qualified auctions must be integrated with 
a continuous order book operated by an open competition trading center. These five requirements 
would not exhaust all possible contexts for which additional priority rules may be needed, and, 

118 
 
as discussed below, open competition trading centers would have flexibility to develop 
additional priority rules as long as such rules are consistent with the requirements in Proposed 
Rule 615(c)(5). 
Pursuant to Proposed Rule 615(c)(5)(i), the first affirmative requirement would be price 
priority — the most favorable price for a segmented order would have priority of execution (the 
lowest priced auction response to a segmented order to buy and the highest priced auction 
response to a segmented order to sell). Price priority maximizes competitive incentives to obtain 
the best prices for segmented orders. 
Pursuant to Proposed Rule 615(c)(5)(ii), the second affirmative requirement would be 
customer priority. “Customer” is defined in Rule 600(b)(23) of Regulation NMS to mean any 
person that is not a broker-dealer. When two auction responses have the best price, and one is 
submitted for the account of a customer and one is submitted for the account of a broker-dealer, 
the customer’s auction response would be required to have priority. In such a case, the 
segmented order of an investor would interact directly with the auction response of another 
investor without the participation of a dealer, thereby promoting the NMS objective set forth in 
section 11A(a)(1)(C)(v) of the Exchange Act. 
Pursuant to Proposed Rule 615(c)(5)(iii), the first negative requirement for execution 
priority would be the prohibition of time priority, subject only to an auction response being 
received by an open competition trading center within the time period prescribed in paragraph 
(c)(2) of Proposed Rule 615. Prohibiting time priority for equally priced auction responses 
eliminates the incentive for a speed race that otherwise could reward market participants with 
resources to spend the most on sophisticated, low-latency trading systems and connectivity. 

119 
 
Pursuant to Proposed Rule 615(c)(5)(iv), the second negative requirement for execution 
priority would be a prohibition against favoring the broker-dealer that routed the segmented 
order to the auction, the originating broker for the segmented order, the open competition trading 
center operating the auction, or any affiliate of the foregoing persons.
248
 This requirement is 
designed to help maintain a level playing field among market participants submitting auction 
responses and thereby focus competition in the auctions on providing the best prices for 
segmented orders. Assigning priority to any firm associated with the handling of the orders or 
their affiliates would be one means for an open competition trading center to attempt to attract 
order flow by rewarding the firms that control such flow coming from the customer, which could 
undermine competition among auction responders to provide the best prices in qualified 
auctions. Given that Proposed Rule 615 would require segmented orders to be routed to qualified 
                                                
248
  “Affiliate” is proposed to be defined in Proposed Rule 600(b)(3) of Regulation NMS to mean, with respect 
to a specified person, any person that, directly or indirectly, controls, is under common control with, or is 
controlled by, the specified person. “Control” is proposed to be defined in Proposed Rule 600(b)(23) of 
Regulation NMS to mean the power, directly or indirectly, to direct the management or policies of a broker, 
dealer, or open competition trading center, whether through ownership of securities, by contract, or 
otherwise. A person is presumed to control a broker, dealer, or open competition trading center if that 
person: (1) is a director, general partner, or officer exercising executive responsibility (or having similar 
status or performing similar functions); (2) directly or indirectly has the right to vote 25% or more of a 
class of voting securities or has the power to sell or direct the sale of 25% or more of a class of voting 
securities of the broker, dealer, or open competition trading center; or (3) in the case of a partnership, has 
contributed, or has the right to receive upon dissolution, 25% or more of the capital of the broker, dealer, or 
open competition trading center. Proposed Rule 600(b)(3) and Proposed Rule 600(b)(23). These definitions 
are substantially the same as the definitions of “affiliate” and “control” prescribed for purposes of an NMS 
Stock ATS’s disclosures about its operations on Form ATS-N with the following modifications: the Form 
ATS-N definition of “affiliate” uses a separately defined term “Person” instead of the statutory definition of 
“person,” and Form ATS-N defines “control” as applicable to the “broker-dealer of the alternative trading 
system” instead of as applicable to a “broker, dealer, or open competition trading center.” It is appropriate 
to use substantially similar definitions of “affiliate” and “control” in the context of Proposed Rule 615 
because, for purposes of Form ATS-N, the Commission defined such terms for use with respect to 
disclosures designed to enable market participants to better evaluate how relationships between certain 
persons could affect the handling of orders on a particular NMS Stock ATS. See ATS-N Adopting Release, 
supra note 159, 83 FR at 88318. The substantially similar proposed definitions, as used in the context of 
Proposed Rule 615, are similarly designed to recognize that relationships among certain persons may 
impact the handling of orders, and are designed to help ensure that the execution priority rules of an open 
competition trading center do not undermine full competition among auction responders in qualified 
auctions by favoring related parties that were involved in routing and executing the order at the open 
competition trading center. 

120 
 
auctions in some contexts, the competition among open competition trading centers to attract 
segmented orders should be focused on generating the best prices for investors. 
Finally, the execution priority requirements set forth in paragraph (c)(5)(v) of Proposed 
Rule 615 address how auction responses would be required to be integrated with the continuous 
order book of an open competition trading center. A continuous order book is proposed to be 
defined in Rule 600(b) of Regulation NMS as a system that allows orders for NMS stocks to be 
accepted and executed on a continuous basis.
249
 This definition would exclude single-priced 
auctions that are limited to a specified time, such as the opening and closing auctions of the 
primary listing exchanges, and that are not continuously available for trading based on the 
initiative of market participants or the open competition trading center. As discussed above, all 
open competition trading centers would operate as automated trading centers displaying 
automated quotations and therefore would have facilities in which orders from market 
participants are accepted and executed on a continuous basis.  
The proposed execution priority requirements primarily are designed to balance the 
objectives of obtaining the best prices for segmented orders and maintaining fair competition 
both in qualified auctions and on continuous order books.
250
 The first such requirement is that 
orders resting on the continuous order book of the open competition trading center operating the 
qualified auction, whether displayed or undisplayed, would have priority over auction responses 
                                                
249
  Proposed Rule 600(b)(22). 
250
  Trades executed in qualified auctions would not qualify for an exception from the trade-through 
requirements of Rule 611 of Regulation NMS, which are discussed in section III above. Accordingly, if a 
qualified auction did not generate a price that was at or within the best-priced protected quotations, the 
open competition trading center would, absent an exception, be prohibited by Rule 611 from executing the 
segmented order. If a restricted competition trading center subsequently decided to execute such segmented 
order, it would need, absent an exception, to comply both with the trade-through requirements of Rule 611 
and with Proposed Rule 615(a) by immediately executing the segmented order at a price that was equal to 
or better for the segmented order than the specified limit price in the qualified auction. 

121 
 
at a less favorable price for the segmented order. This is another application of the principle of 
price priority that underlies proposed paragraph (c)(5)(i). 
The second requirement is that displayed orders resting on the continuous order book 
would be required to have priority at the same price over auction responses, while, in turn, 
auction responses would be required to have priority at the same price over undisplayed orders 
resting on the continuous order book. Rewarding the display of orders serves the purpose of 
promoting public price transparency, consistent with the NMS objective in section 
11A(a)(1)(C)(iii) of the Exchange Act. As between undisplayed orders and auction responses, 
however, giving priority to auction responses at the same price would encourage participation in 
qualified auctions, thereby promoting the core order competition objective of Proposed Rule 615. 
Moreover, unlike displayed orders that can be executed immediately because they present a 
known opportunity to trade for market participants, undisplayed orders on continuous order 
books are not known to other market participants and potentially create a risk of gaming 
behavior by broker-dealers with knowledge of segmented orders that could undermine 
competition in qualified auctions. As discussed in section IV.F below, this potential gaming 
behavior is prohibited in paragraph (f) of Proposed Rule 615. Assigning priority to auction 
responses over undisplayed orders at the same price would help address the root incentives for 
such behavior. 
While Proposed Rule 615(c) sets forth a series of execution priority requirements for 
qualified auctions, open competition trading centers also would have flexibility to develop 
additional execution priority rules for their auction mechanism, as long as they were consistent 
with the proposed requirements. As one example, Proposed Rule 615(c) does not prescribe 
execution priority when an open competition trading center receives multiple best priced 

122 
 
responses for the account of customers because multiple possibilities would be consistent with 
the objectives of Proposed Rule 615. An open competition trading center would be free to 
develop rules for assigning execution priority among such customer responses, as long as they 
were consistent with Proposed Rule 615(c).
251
  
Moreover, Proposed Rule 615 allows flexibility for open competition trading centers in a 
variety of other contexts. For example, it does not specify whether an open competition trading 
center may or may not simultaneously operate multiple qualified auctions for the same NMS 
stock, and if so, the execution priority required for auction responses across such auctions. 
Proposed Rule 615 also would not impose requirements for auction responses, other than the 
requirement in paragraph (c)(1) that an auction message initiating a qualified auction would be 
required to invite “priced” auction responses. 
D. Open Competition Trading Center Requirements 
Paragraph (d) of Proposed Rule 615 sets forth requirements for national securities 
exchanges and NMS Stock ATSs that intend to act as open competition trading centers that 
operate qualified auctions for segmented orders. First, it would prohibit a national securities 
exchange or NMS Stock ATS from operating a qualified auction unless the exchange or ATS 
meets the definition of open competition trading center and complies with the provisions of 
Proposed Rule 615 for qualified auctions, which were discussed in section IV.B.2 and IV.C 
above. Second, it would prohibit an open competition trading center from operating a system, 
other than a qualified auction, that is limited in whole or in part to the execution of segmented 
orders, unless any segmented order executed through the system meets requirements that parallel 
                                                
251
  As discussed above in section IV.B.2, national securities exchanges must file proposed rules with the 
Commission to reflect material changes in their rules, while NMS Stock ATSs must update their Form 
ATS-Ns to reflect material changes in their rules. 

123 
 
those specified for an exception in paragraph (b) of Proposed Rule 615.
252
 This proposed 
prohibition is identical to the prohibition in paragraph (g) of Proposed Rule 615 that would apply 
to all national securities exchanges, regardless of whether they meet the definition of an open 
competition trading center, and is discussed further in section V.G below. 
E. Originating Broker Requirements 
Paragraph (e) of Proposed Rule 615 sets forth three requirements for originating brokers. 
First, an originating broker would be required to establish, maintain, and enforce written policies 
and procedures reasonably designed to identify the orders of customers as segmented orders. 
Given that the order competition requirement of paragraph (a) would apply solely to segmented 
orders, it is imperative that customer orders be properly identified as such by the originating 
broker, which will have the knowledge of its customer accounts necessary to make such 
identification. As discussed above in section IV.B.1, the first part of the proposed definition of 
segmented order relating to the nature of the account is based on existing SRO rules and, 
accordingly, is designed to facilitate ease of compliance by originating brokers. The second part 
                                                
252
  Proposed Rule 615(b); Proposed Rule 615(d)(2)(i) through (v). Specifically, a segmented order executed 
through such system of an open competition trading center would be required to: (1) be received and 
executed during a time period when no open competition trading center is operating a qualified auction for 
the segmented order; (2) have a market value of at least $200,000 calculated with reference to the midpoint 
of the NBBO when the segmented order was received by the open competition trading center; (3) be 
executed by the open competition trading center at a price that is equal to or more favorable for the 
segmented order than the midpoint of the NBBO when the segmented order was received by the open 
competition trading center; (4) be a limit order with a limit price selected by the customer that is equal to or 
more favorable for the segmented order than the midpoint of the national best bid and national best offer 
when the segmented order is received by the open competition trading center; or (5) be received and 
executed by the open competition trading center during a time period when no open competition trading 
center is operating a qualified auction for the segmented order that accepts orders that are not entirely in 
whole shares, and be a size, selected by the customer, that is not entirely in whole shares of an NMS stock, 
in which case any portion of such segmented order that is less than one whole share of the NMS stock, and 
only such portion, may be executed through such system. 

124 
 
of the proposed definition relating to frequency of trading in an account would be based on 
customer trading information that originating brokers are required to maintain.
253
 
Second, an originating broker would be prohibited from routing a customer order 
identified as a segmented order without also identifying the order to the routing destination as a 
segmented order.
254
 This requirement would work together with an analogous requirement in 
paragraph (f) of Proposed Rule 615 for all broker-dealers that route segmented orders that is 
discussed in section IV.F below. Together, the proposed requirements are designed to ensure that 
a segmented order continues to be identified as such throughout the routing chain from 
origination through execution. Proper marking of segmented orders would be essential for a 
restricted competition trading center to know that it must comply with the order competition 
requirement of paragraph (a). The proposed identification requirements of paragraph (e) for 
originating brokers and paragraph (f) for all broker-dealers are designed to assure that no 
segmented order reaches a restricted competition trading center without the proper identification. 
If there is more than one originating broker for a segmented order, the broker that carries the 
individual investor’s customer account would likely be the originating broker that maintains the 
policies and procedures to identify segmented orders as such, as well as identifies and marks the 
orders.  
                                                
253
  See 17 CFR 240.17a-3(a) (requiring broker-dealers to make and keep, among other things, current blotters 
containing an itemized daily record of all purchases and sales of securities and the account for which each 
such purchase and sale was effected). 
254
  17 CFR 242.613 (Rule 613 of Regulation NMS) requires each national securities exchange and national 
securities association to jointly file an NMS plan governing the creation, implementation, and maintenance 
of a consolidated audit trail (“CAT”) which is reported to a central repository. The rule specifies the type of 
data to be collected and reported. Pursuant to Rule 613(c)(7), any CAT plan participant or broker-dealer 
that receives, originates, or handles orders in NMS stocks must report certain information regarding those 
orders, including the “material terms” of each order. Rule 613(j)(7) defines “material terms of an order” to 
include “any special handling instructions.” Because Proposed Rule 615 would mandate special handling 
for segmented orders, the identification of the order as a segmented order, any exceptions applicable to its 
handling, and the identity of the originating broker or an indication of a certification of anonymity would 
be required by current Rule 613 to be reported as material terms in each event in the lifecycle. 

125 
 
Third, an originating broker that makes the certification referred to in paragraph 
(c)(1)(iii) of Proposed Rule 615 would be required to establish, maintain, and enforce written 
policies and procedures reasonably designed to assure that the identity of the originating broker 
will not be disclosed, directly or indirectly, to any person that potentially could participate in the 
qualified auction or otherwise trade with the segmented order. As discussed in section IV.C.1 
above, knowing the identity of an originating broker could provide a significant information 
advantage to a market participant when pricing an auction response if other market participants 
did not have this information. The effect of the certification referred to in paragraph (c)(1)(iii) of 
Proposed Rule 615 would be that either all responders in a qualified auction would know the 
identity of the originating broker (if the certification is not made) or no responders in a qualified 
auction would know the identity of the originating broker (if the certification is made). In the 
absence of an appropriate certification from an originating broker, an open competition trading 
center would be required to identify the originating broker in the auction message disseminated 
in consolidated market data. The “written policies and procedures” requirement of proposed 
paragraph (e)(3) specifies the responsibility of an originating broker in making such a 
certification. As one potential example of such policies and procedures, an originating broker 
could provide that such originating broker will route all the segmented orders of its customers 
directly to an open competition trading center for a qualified auction, without disclosing the 
existence of such orders to any other person. Another potential example would be for the 
originating broker to use a single broker for routing segmented orders to open competition 
trading centers for qualified auctions, and the single executing broker represents in writing that it 
will not participate in any qualified auction for the segmented orders or otherwise trade with the 

126 
 
segmented orders, and that it will not disclose the existence of such segmented orders to any 
other person. 
As mentioned in section IV.B.4 above, broker business practices can vary in terms of 
how customer accounts are handled, and there may be multiple originating brokers for a 
segmented order. In addition, such brokers currently enter into agreements with one another to 
allocate certain responsibilities with respect to the handling of customer accounts, such as those 
referred to as carrying agreements. The Commission has designed Proposed Rule 615 to preserve 
brokers’ existing flexibility to allocate responsibilities among themselves. Accordingly, 
paragraph (e)(4) of Proposed Rule 615 provides that, where there are multiple originating 
brokers for a segmented order, an originating broker shall not be deemed to be in violation of the 
provisions of paragraph (e)(1) through (3) arising solely from a failure to meet a responsibility 
that was specifically allocated by prior written agreement to another originating broker. 
F. Broker-Dealer Requirements 
Paragraph (f) of Proposed Rule 615 sets forth two requirements for all broker-dealers 
with respect to segmented orders. First, pursuant to proposed paragraph (f)(1), a broker-dealer 
that receives an order identified as a segmented order would be prohibited from routing such 
order without identifying the order to the routing destination as a segmented order. As discussed 
in section IV.E above, this requirement is designed to work together with an analogous 
requirement for originating brokers to help assure that no segmented order reaches a restricted 
competition trading center, even if routed through multiple broker-dealers or trading centers, 
without being properly identified as a segmented order. 
Second, paragraph (f)(2) of Proposed Rule 615 sets forth a requirement for all broker-
dealers, which includes originating brokers, that is designed to prevent gaming behavior that 

127 
 
could undermine fair competition in qualified auctions and on continuous order books. In 
particular, it would prohibit a broker-dealer with knowledge of where a segmented order is to be 
routed from submitting an order, or enabling an order to be submitted by any other person, to the 
continuous order book of an open competition trading center or of a national securities exchange 
that could have priority to trade with the segmented order at such open competition trading 
center or national securities exchange. 
The prohibition of paragraph (f)(2) is designed to address two types of potential gaming 
behavior by broker-dealers. First, absent this proposed prohibition, a broker-dealer with 
knowledge that a segmented order is to be routed to a qualified auction could submit, or enable 
another person to submit (such as by providing information to another person), to the open 
competition trading center conducting such auction a displayed contra-side order that was priced 
at or better than the specified limit price of the segmented order. As discussed in section IV.C 
above, displayed orders on the continuous order book of an open competition trading center 
could have priority to trade with a segmented order ahead of equally priced auction responses. 
The submission of contra-side orders to a continuous order book to avoid participating in a 
qualified auction, however, could undermine fair competition in the qualified auction and 
therefore would be prohibited by paragraph (f)(2). 
A second type of gaming behavior prohibited by paragraph (f)(2) of Proposed Rule 615 
relates to segmented orders that are not routed to qualified auctions, but rather to a continuous 
order book of an open competition trading center or a national securities exchange. As stated in 
section IV.A above, the order competition requirement of paragraph (a) of Proposed Rule 615 
does not apply to an open competition trading center or to a national securities exchange, 
regardless of whether such exchange is an open competition trading center, and therefore, a 

128 
 
broker-dealer could route a segmented order directly to an open competition trading center or a 
national securities exchange.
255
 However, there remains an incentive for a broker-dealer to seek 
to trade with a segmented order outside of the fair competition of a qualified auction by 
submitting a contra-side order at the same time it submits the segmented order (i.e., a “paired 
order”) to a continuous order book of an open competition trading center or national securities 
exchange with the expectation of executing against the segmented order. Paragraph (f)(2) is 
designed to address this potential by prohibiting a broker-dealer with knowledge of where a 
segmented order is to be routed from submitting, or enabling any other person to submit (such as 
by providing information to another person), an order to an open competition trading center or a 
national securities exchange that could have priority to trade with the segmented order. 
In addition to the requirements for broker-dealers set forth in Proposed Rule 615, all 
other existing obligations of broker-dealers for customer orders, including best execution 
discussed in section III.B above, would continue to apply. For example, an important 
consideration for broker-dealers in handling a segmented order would be the relative 
performance of qualified auctions at different open competition trading centers in terms of their 
order execution quality. Broker-dealers with best execution responsibilities for segmented orders 
generally should consider the available information on execution quality for segmented orders at 
different qualified auctions.
 
To provide broker-dealers with relevant information on qualified 
auctions, if Proposed Rule 615 is adopted, the effective NMS plans for NMS stocks would need 
                                                
255
  As discussed elsewhere in this release, both of these types of trading centers are subject to rigorous 
requirements for access and competition, and they therefore would not be prohibited from executing a 
segmented order without it being submitted to a qualified auction. In addition to the applicable proposed 
requirements under Proposed Rule 615, a broker-dealer still would be required to satisfy its best execution 
responsibilities if bypassing a qualified auction and routing a segmented order directly to an open 
competition trading center or a national securities exchange. 

129 
 
to be conformed to provide for the collection and dissemination of a sale condition in transaction 
reports for national securities exchanges and NMS Stock ATSs indicating that the transaction 
was executed in a qualified auction under Proposed Rule 615(c).
256
 
G. National Securities Exchange Requirements 
Exchanges are excluded from the proposed definition of a restricted competition trading 
center because, as discussed in section III.B above, they are subject to the extensive Exchange 
Act requirements for access and competition. Accordingly, the order competition requirement of 
paragraph (a) of Proposed Rule 615 does not apply to a national securities exchange, regardless 
of whether such exchange meets the definition of an open competition trading center. To the 
extent consistent with their best execution responsibilities, broker-dealers would be permitted to 
route segmented orders directly to any national securities exchange without first routing the 
order to a qualified auction. One potential example of when such a direct route could be 
consistent with best execution is a fast market when prices are moving rapidly away from a 
segmented order (prices increasing for buy orders and prices decreasing for sell orders). In this 
example, a broker-dealer could determine that obtaining a better price in a qualified auction than 
a displayed quotation is unlikely, and the broker-dealer could route a segmented order directly to 
execute against the best available price available at a national securities exchange or an open 
competition trading center. Competition in qualified auctions, however, could be undermined if 
national securities exchanges and open competition trading centers were permitted to siphon 
segmented order flow away from qualified auctions by operating trading mechanisms that were 
limited, in whole or in part, to segmented orders.  
                                                
256
  The technical specifications of the NMS plans for disseminating consolidated market data include sale 
condition modifiers for trade reports that specify various types of trades, including some auction trades. 

130 
 
Accordingly, paragraphs (d)(2) (as discussed above) and (g) of Proposed Rule 615 would 
prohibit all open competition trading centers and national securities exchanges from operating a 
system, other than a qualified auction, that is limited, in whole or in part, to the execution of 
segmented orders, unless any segmented order executed through such system qualifies for 
exceptions that are the same as those in Proposed Rule 615(b).
257
 This prohibition would apply to 
many of the RLPs currently operated by national securities exchanges.
258
 An example of a 
trading system that would not be prohibited under paragraphs (d)(2) and (g), however, would be 
one that is limited to the execution of segmented orders at prices equal to the NBBO midpoint, 
which would qualify for the exception in Proposed Rule 615(g)(3).
259
 
                                                
257
  Proposed Rule 615(b); Proposed Rule 615(d)(2)(i) through (v); Proposed Rule 615(g)(1) through (5); and 
supra note 252 and accompanying text. Specifically, a segmented order executed through such system of a 
national securities exchange would be required to: (1) be received during a time period when no open 
competition trading center is operating a qualified auction for the segmented order; (2) have a market value 
of at least $200,000 calculated with reference to the midpoint of the NBBO when the segmented order was 
received by the national securities exchange; (3) be executed by the national securities exchange at a price 
that is equal to or more favorable for the segmented order than the midpoint of the NBBO when the 
segmented order was received by the national securities exchange; (4) be a limit order with a limit price 
selected by the customer that is equal to or more favorable for the segmented order than the midpoint of the 
national best bid and national best offer when the segmented order is received by the national securities 
exchange; or (5) be received and executed by the national securities exchange during a time period when no 
open competition trading center is operating a qualified auction for the segmented order that accepts orders 
that are not entirely in whole shares, and be a size, selected by the customer, that is not entirely in whole 
shares of an NMS stock, in which case any portion of such segmented order that is less than one whole 
share of the NMS stock, and only such portion, may be executed through such system. 
258
  As discussed in section III.B.2.c, RLPs are exchange trading mechanisms limited to retail orders, as defined 
in the exchanges’ rules. 
259
  IEX’s RLP, for example, only permits retail liquidity provider orders to be midpoint peg orders. See 
Securities Exchange Act Release No. 93217 (Sep. 30, 2021), 86 FR 55663 (Oct. 6, 2021) (order approving 
an exemption from Rule 602 of Regulation NMS for IEX’s retail price improvement program and 
describing that IEX’s program is different because retail liquidity provider orders can only be midpoint peg 
orders); IEX Rules 11.190(b)(14) (Retail Liquidity Provider Order) and 11.232 (Retail Price Improvement 
Program). IEX has rules that will also permit orders in its RLP to be executed at prices better than the 
NBBO midpoint. See Securities Exchange Act Release No. 94884 (May 10, 2022), 87 FR 29768 (May 16, 
2022) (SR-IEX-2022-04). 

131 
 
V. Request for Comment 
The Commission generally requests comment from the public on all aspects of Proposed 
Rule 615, including its objectives and its terms to achieve those objectives. The Commission also 
generally requests comment on the proposed definitions to be added to Rule 600 and their use in 
the context of Proposed Rule 615. More specific requests for comment are set forth below. With 
respect to any comments, the Commission notes that they are of the greatest assistance to this 
rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in 
those comments.  
1. The Commission requests comment on the operation and effectiveness of Proposed 
Rule 615. Would exposing segmented orders to competition in qualified auctions be 
likely to generate better prices for individual investors than are provided by current 
broker-dealer routing practices? Would the likelihood of better prices vary across 
different types of NMS stocks, such as those with different levels of liquidity and 
trading volume? Do commenters believe that the wide dissemination of auction 
messages for qualified auctions in NMS stocks would be likely to affect trading or 
quoting behavior in NMS stocks during the time period of the auction and, if so, 
would such an effect promote or detract from obtaining the best possible price for 
segmented orders in the qualified auctions? 
2. Proposed Rule 615(c)(2) would prohibit display of auction responses. In the case of 
an execution in a qualified auction, a transaction report maintaining the anonymity of 
the parties would be displayed in consolidated market data. Does the proposed 
prohibition sufficiently mitigate the possibility of information leakage for participants 
in a qualified auction? Are there different or additional requirements that would better 
mitigate the possibility of information leakage? 

132 
 
3. Is focusing on the accounts of natural persons, as well as accounts held in legal form 
on behalf of a natural person or group of related family members, and the level of 
trading activity in such accounts an appropriate approach to identify orders that are 
included, and those that are excluded, from the proposed definition of a segmented 
order?  
4. Should the proposed definition of “group of related family members” be more or less 
inclusive, and if so, in what regard?  
5. Should the level of trading activity used to determine which accounts are associated 
with segmented orders be lower or higher than 40 trades per day? Is the six-month 
time frame is appropriate? If other metrics would be more appropriate, please explain 
why and, if possible, provide data to support your position. 
6. Should any large orders be entirely excluded from the definition of segmented order 
and therefore not eligible to trade in qualified auctions, as opposed to the rule 
proposal which would provide an exception for orders of $200,000 or more and that 
allows a choice of whether to submit such orders to qualified auctions? 
7. The proposed definition of an open competition trading center would require national 
securities exchanges to operate as an SRO trading facility that is an automated trading 
center and displays automated quotations that are disseminated in consolidated 
market data? Is this requirement appropriate or should it be modified in any respect? 
8. Is requiring a minimum level of trading volume for national securities exchanges to 
qualify as open trading competition centers an appropriate means to achieve the 
objectives of Proposed Rule 615? If so, should the 1% level should be lower or 
higher? For example, should the 1% level be lowered to enable additional national 

133 
 
securities exchanges to compete for segmented orders by operating qualified auctions, 
or should the 1% be increased to help limit the potential costs of market 
fragmentation? Are the other parameters of the volume threshold appropriate to 
achieve the objective of ensuring that qualified auctions are offered by trading centers 
that have sufficient volume to provide vigorous competition? Is average daily volume 
during at least 4 of the preceding 6 calendar months an appropriate parameter, or are 
there more appropriate parameters? Is there another approach that would be more 
effective to help limit the potential costs of market fragmentation that could be 
associated with the requirements of Proposed Rule 615?  
9. Under the proposal, national securities exchanges would be required to operate 
pursuant to their own rules providing that such exchanges would comply with the 
requirements for qualified auctions. Would this requirement provide sufficient notice 
to market participants concerning the operation of qualified auctions by national 
securities exchanges? 
10. Should an NMS Stock ATS, to meet the proposed definition of an open competition 
trading center, be required to display quotes through an SRO display-only facility? 
Also, should an NMS Stock ATS be required to operate as an automated trading 
center and display automated quotations that are disseminated in consolidated market 
data?  
11. Do commenters believe that identifying an NMS Stock ATS as the venue of 
execution in transaction reports that are disseminated in consolidated market data 
would be helpful to market participants when assessing qualified auctions?  

134 
 
12. Should an NMS Stock ATS be required to permit any registered broker-dealer to 
become a subscriber, except for a broker-dealer that is subject to a statutory 
disqualification or, pursuant to written policies and procedures, does not meet 
standards of financial responsibility or operational capability? 
13. Is an equal access standard appropriate for NMS Stock ATSs to meet the definition of 
an open competition trading center and operate qualified auctions? Alternatively, 
should other approaches be used to achieve the objective of a level playing field 
regarding Proposed Rule 615 between NMS Stock ATSs and national securities 
exchanges, given their different statutory and regulatory regimes? For example, 
should the existing fair access requirement in Rule 301(b)(5) of Regulation ATS be 
used instead of the proposed equal access requirement? Are there other aspects of 
access to an NMS Stock ATS operating as an open competition trading center 
offering qualified auctions that should be addressed by Proposed Rule 615? 
14. Is requiring a minimum level of trading volume for NMS Stock ATSs an appropriate 
means to achieve the objectives of Proposed Rule 615? If so, should the 1% volume 
threshold should be lower or higher? Are the other parameters of the volume 
threshold appropriate to achieve the objective of ensuring that qualified auctions are 
offered by trading centers that have sufficient volume to provide vigorous 
competition? Is average daily volume during at least 4 of the preceding 6 calendar 
months an appropriate parameter, or are there more appropriate parameters? Is there 
another approach that would be more effective to help limit the potential costs of 
market fragmentation that could be associated with the requirements of Proposed 
Rule 615? 

135 
 
15. Would market participants have sufficient notice concerning the operation of 
qualified auctions by NMS Stock ATSs if they operate pursuant to an effective Form 
ATS-N that evidences compliance with the requirements for a qualified auction in 
Proposed Rule 615(c) and with the other provisions of the proposed definition of an 
open competition trading center? 
16. Are there any other requirements, beyond those specified in the proposed definition 
of an open competition trading center, that national securities exchanges or NMS 
Stock ATSs should meet to be eligible to qualify as open competition trading centers 
and operate qualified auctions? 
17. Should national securities exchanges that do not meet the proposed definition of an 
open competition trading center be excluded, as proposed, from the definition of a 
restricted competition trading center based on their statutory requirements relating to 
access and competition? 
18. Does the proposed definition of originating broker appropriately capture the brokers 
that would make the determination of whether an order falls within the definition of a 
segmented order, as well as the broker that would be required to be identified in 
auction messages? Instead of allowing originating brokers to choose whether to be 
identified in auction messages, should Proposed Rule 615, as a means to promote 
greater uniformity of execution quality for segmented orders from different 
originating brokers, prohibit any identification of the originating broker in auction 
messages and require originating brokers to certify that their identity will not be 
disclosed for all segmented orders? Should originating brokers for a segmented order, 
other than the broker responsible for approving the opening of accounts with 

136 
 
customers, be identified in the auction message? Should carrying or clearing brokers 
that are an originating broker for a segmented order also be disclosed in an auction 
message? Would such information be useful to market participants’ decisions whether 
to submit auction responses and at what prices? 
19. Are the five proposed exceptions in paragraph (b) of Proposed Rule 615 appropriate? 
Should additional exceptions be included, such as an exception for orders directed by 
the customer to a particular trading center?  
20. Instead of providing an exception for executions of segmented orders during a time 
period when no open competition trading center is operating a qualified auction, 
should the execution of segmented orders during such a time period be prohibited? Is 
market value an appropriate approach to identifying large trades that should be 
excepted from Proposed Rule 615? If so, should the threshold amount of $200,000 be 
lower or higher? For example, do commenters believe that segmented orders in NMS 
stocks with a market value of up to $200,000 could be executed efficiently in 
qualified auctions at prices that mostly would be at or within the NBBO? If not, what 
market value should be used to achieve this objective and should it vary based on the 
trading characteristics of a particular NMS stock? 
21. Would it be appropriate for Proposed Rule 615(b) to include an exception for 
executions at a price less favorable to the segmented order than a midpoint execution, 
so long as the segmented order is executed at a price with a specified amount of price 
improvement? If so, what would be the appropriate level of price improvement?  
22. Is it appropriate for Proposed Rule 615(b) to include an exception for executions of a 
segmented order with a limit price selected by the customer that is equal to or more 

137 
 
favorable for the segmented order than the midpoint of the national best bid and 
national best offer when the segmented order is received by the restricted competition 
trading center? Should there be an exception for a wider range of limit orders, in 
addition to, or instead of this proposed exception? For example, should there be an 
exception for all non-marketable limit orders (i.e., any buy limit order with a price 
less than the NBO and any sell limit order with a price greater than the NBB)?  
23. Is it appropriate for Proposed Rule 615(b) to include the exception for executions of 
segmented orders where no qualified auctions are being offered for orders that are not 
entirely in whole shares, and the customer selected a size for a segmented order that is 
not entirely in whole shares of an NMS stock, in which case any portion of such 
segmented order that is less than one whole share of the NMS stock, and only such 
portion, would not be subject to the order competition requirement of paragraph (a) of 
Proposed Rule 615? Would a broker-dealer’s best execution responsibilities be 
sufficient to ensure that the fractional portion of the segmented order is executed in 
the best market available? Do commenters believe that, if Proposed Rule 615 were 
adopted, open competition trading centers would offer qualified auctions that 
accommodate fractional shares? If not, should a broker-dealer be required to round up 
a segmented order with a fractional component before submitting the order to a 
qualified auction, with the broker-dealer required to accept the rounded up portion of 
the order? Or would broker-dealers be less willing to offer their customers 
transactions in fractional shares if rounding up were required? 
24. Should auction messages be required to include the side (buy or sell) of a segmented 
order? For example, if side were not included in auction messages, market 

138 
 
participants could be allowed to provide auction responses for one or both sides, with 
only auction responses on the opposite side of the segmented order considered for 
execution. Do commenters believe that such an approach would limit the extent to 
which quoted price might move away from segmented orders during the pendency of 
a qualified auction? 
25. Should the minimum or maximum time periods for qualified auctions be shorter or 
longer? Should a restricted competition trading center be permitted to execute a 
segmented order that was not executed in a qualified auction at the specified limit 
price as soon as reasonably possible, or should there be a specified time period for 
execution? 
26. Should the pricing increment be smaller or larger than the proposed 0.1 cent for 
segmented orders and auction responses with prices of $1.00 or more per share? 
Would, for example, the potential benefit for segmented orders of a smaller pricing 
increment, such as 0.05 cent, outweigh the potential cost of less direct interaction of 
investor orders without the participation of a dealer?  
27. Does Proposed Rule 615(c)(4) appropriately address the fees and rebates for qualified 
auctions? Is the proposed prohibition of any fee for the submission or execution of 
segmented orders appropriate? Should the proposed 5 mil cap on fees for executed 
auction responses priced at $1.00 per share or more be higher or lower? Should the 
proposed 5 mil cap on rebates for segmented orders priced at $1.00 per share or more 
be higher or lower? Is it appropriate to require that the rates for fees and rebates be 
flat in all auctions? 

139 
 
28. Are the execution priority requirements specified in Proposed Rule 615(c)(5) 
appropriate? Should auction responses of customers have priority over auction 
responses of broker-dealers at the same price? Is it appropriate to prohibit execution 
priority terms that favor the broker-dealer that routed the segmented order, the 
originating broker for the segmented order, and the open competition trading center 
operating the auction, as well as affiliates of the foregoing persons? Should the 
requirements for execution priority of orders resting on the continuous order book of 
an open competition trading center be modified? Should displayed orders on the 
continuous order book have priority over auction responses at the same price? Should 
auction responses have priority over undisplayed orders on the continuous order book 
at the same price? 
29. Should an open competition trading center be permitted to give execution priority 
advantages to market makers that accept objective affirmative obligations, such as 
public quoting obligations or an obligation to fill segmented orders at the relevant 
NBBO if such orders do not otherwise receive an execution in qualified auctions? For 
example, Table 7 in section VII.B.4 below shows that 1.67% of marketable order 
shares are executed by wholesalers at prices outside the NBBO at the time the 
wholesaler received the order. Do commenters believe that, if Rule 615 were adopted 
as proposed, a larger percentage of marketable orders of individual investors would 
be executed at prices outside the NBBO when the order is received by a trading 
center? 

140 
 
30. Should the broker routing a segmented order to a qualified auction be required to 
execute the order, or any unexecuted portion thereof, at the specified limit price or 
some other price if the segmented order is not executed in full in the auction? 
31. Should there be parameters for what the specified limit price selected by a broker 
routing a segmented order to a qualified auction could be? For example, should the 
specified limit price be required to be within a range that is tied to the midpoint of the 
NBBO at the time the segmented order is received? 
32. Should an open competition trading center be permitted to operate multiple qualified 
auctions in the same NMS stock simultaneously? 
33. Should open competition trading centers have flexibility to determine aspects of 
qualified auctions that are not specified by Proposed Rule 615? Are there additional 
aspects for qualified auctions that should be specified by rule? For example, are there 
additional aspects of execution priority that should be specified by rule or, 
alternatively, that open competition trading centers should have greater flexibility to 
determine?  
34. Should open competition trading centers and national securities exchanges be allowed 
to continue to operate trading systems, other than qualified auctions, that are limited, 
in whole or in part, to the execution of segmented orders and that do not fall within 
one of the five exceptions in Proposed Rule 615(d)(2) and (g)? For example, should 
national securities exchanges be permitted to continue to operate RLPs that do not 
qualify for one of the exceptions in Proposed Rule 615(g)? Are there other types of 
limited trading facilities operated by national securities exchanges or open 
competition trading centers that should be permitted? 

141 
 
35. Is it appropriate, as provided in Proposed Rule 615(f)(4), to prohibit broker-dealers 
with knowledge of where a segmented order is to be routed for execution from 
submitting, or enabling the submission, of an order to the continuous order book of an 
open competition trading center that could trade with that segmented order? Do 
commenters believe that this prohibition could significantly interfere with broker-
dealer handling of customer orders and, if so, would limiting the prohibition to the 
proprietary orders of a broker-dealer and its affiliates be consistent with the purposes 
of Proposed Rule 615? 
36. Does Proposed Rule 615(e)(4) provide sufficient clarification as to which broker-
dealer would be subject to the obligations of Proposed Rule 615(e) when there are 
multiple originating brokers for a segmented order and such originating brokers have 
in place a written agreement that allocates their responsibilities with respect to 
customer orders? 
37. Does Rule 613 of Regulation NMS and the Consolidated Audit Trail NMS Plan 
require adequate reporting of all elements of this proposed rule so that regulators can 
evaluate compliance and study its effectiveness?
260
 
VI. Paperwork Reduction Act Analysis 
Certain provisions of Proposed Rule 615 contain “collection of information” 
requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).
261
 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. An 
                                                
260
  See supra note 254 (discussing the type of data to be collected and reported pursuant to the CAT NMS 
Plan). 
261
  44 U.S.C. 3501 et seq. 

142 
 
agency may not conduct or sponsor, and a person is not required to respond to, a collection of 
information unless the agency displays a currently valid control number. The title of the new 
collection of information is “Order Competition Rule.” The requirements of this collection of 
information would be mandatory for originating brokers, brokers and dealers that route 
segmented orders, national securities exchanges and NMS Stock ATSs that operate qualified 
auctions as open competition trading centers, and national securities associations that provide 
auction message information for dissemination in consolidated market data. 
A. Summary of Collection of Information 
Proposed Rule 615 and the proposed related amendments would create burdens under the 
PRA by creating the new collections of information described below for market participants that 
handle or execute segmented orders, or operate qualified auctions to provide competition for 
segmented orders.  
 
Proposed Rule 615 would require an open competition trading center to comply with the 
requirements of paragraph (c) for operation of a qualified auction for segmented orders.
262
 
Pursuant to paragraph (c)(1), an open competition trading center operating a qualified auction 
would be required to provide an auction message announcing the initiation of a qualified auction 
for a segmented order for dissemination in consolidated market data. Each auction message shall 
invite priced auction responses to trade with a segmented order and shall include, among other 
things, the identity of the originating broker.
263
  
                                                
262
  Supra section IV.C. 
263
  As discussed above in section IV.C.1, the identity of the originating broker is not required to be disclosed, 
however, if the originating broker makes the requisite certification.  

143 
 
 
 
Paragraph (e)(1) would require originating brokers to establish, maintain, and enforce 
written policies and procedures reasonably designed to identify the orders of customers as 
segmented orders.  
 
Paragraph (e)(2) of Proposed Rule 615 would require originating brokers to identify a 
segmented order as such to any destination the broker routes the order. Additionally, pursuant to 
paragraph (f)(1) of Proposed Rule 615, no broker-dealer that receives an order identified as a 
segmented order shall route the order without identifying the order as a segmented order to the 
routing destination. Thus, originating brokers and other broker-dealers that route segmented 
orders would be required to mark segmented orders as such.  
 
Pursuant to paragraph (e)(3), if the originating broker for a segmented order that is the 
originating broker responsible for approving the opening of accounts with customers determines 
to make the certification referenced in paragraph (c)(1)(iii) of Proposed Rule 615, the originating 
broker shall establish, maintain, and enforce the required policies and procedures reasonably 
designed to assure that the identity of the originating broker will not be disclosed.
264
 As 
discussed above, the certification must also be communicated to the open competition trading 
center operating the qualified auction.
265
 The Commission believes that broker-dealers would 
likely use order marking systems to communicate to an open competition trading center whether 
                                                
264
  Supra section IV.E. 
265
  Supra section IV.C.1. 

144 
 
an originating broker has made the certification referenced in Proposed Rule 615(c)(1)(iii). 
Accordingly, the originating broker with responsibility for transmitting orders for a customer’s 
account would mark segmented orders to indicate that the certification has been made, and other 
broker-dealers that receive and route such orders would also mark such orders accordingly. As 
discussed below, the Commission believes that broker-dealers would have an initial burden to 
modify their systems to be able to mark segmented orders as such, and an ongoing burden to 
mark segmented orders. The Commission also believes that broker-dealers would include in 
those systems modifications, the ability to communicate whether an originating broker has made 
the referenced certification, and on an ongoing basis would include the certification information, 
as applicable, when marking segmented orders. Thus, the Commission believes that the initial 
burden for broker-dealers to modify their systems to mark orders as segmented orders and the 
ongoing burden to mark segmented orders as such, as discussed below, would subsume the 
burden to mark orders to communicate when the certification has been made and therefore 
estimates no additional costs associated with communication of the certification. 
 
Pursuant to paragraph (d)(1) of Proposed Rule 615, a national securities exchange or 
NMS Stock ATS shall not operate a qualified auction for segmented orders unless it meets the 
definition of open competition trading center in Proposed Rule 600(b)(64).
266
 For an NMS Stock 
ATS to qualify as an open competition trading center eligible to operate a qualified auction, 
Proposed Rule 600(b)(64)(ii)(D) would require the NMS Stock ATS to permit any registered 
broker or dealer (other than a broker or dealer subject to a statutory disqualification) to become a 
subscriber of the ATS. The NMS Stock ATS could, however, pursuant to written policies and 
                                                
266
  Supra section IV.B.2, and IV.D. 

145 
 
procedures, prohibit a broker or dealer from being or becoming a subscriber, or impose 
conditions on a broker or dealer subscriber, that does not meet standards of financial 
responsibility or operational capability, as are prescribed by the written policies and procedures. 
Thus, to be able to exclude a broker-dealer from becoming a subscriber (other than a broker or 
dealer subject to a statutory disqualification), or imposing conditions on such a subscriber, the 
NMS Stock ATS would be required to have written policies and procedures. 
B. Proposed Use of Information 
 As discussed above,
267
 Proposed Rule 615 is designed to benefit individual investors by 
enhancing the opportunity for their orders to receive more favorable prices than they receive in 
the current market structure, as well as to benefit investors generally by giving them an 
opportunity to interact directly with a large volume of individual investor orders that are mostly 
inaccessible to them in the current market structure, by requiring that individual investor orders 
be exposed to order-by-order competition in fair and open auctions designed to obtain the best 
prices before such orders could be internalized by wholesalers or any other type of trading center 
that restricts order-by-order competition. 
 
The auction messages provided under paragraph (c)(1) of Proposed Rule 615 would be 
disseminated in consolidated market data and would be used by market participants to determine 
whether to submit auction responses. As discussed above, the wide dissemination of these 
auction messages would promote competition by soliciting potential auction responses from a 
wide spectrum of market participants.
268
 
                                                
267
  Supra section I. 
268
  Supra section IV.C.1. 

146 
 
 
 
The requirements of paragraph (e)(1) of Proposed Rule 615 are designed to ensure that 
originating brokers are able to properly identify segmented orders. Specifically, written policies 
and procedures established pursuant to Proposed Rule 615(e)(1) would help a broker develop a 
process, relevant to its customers and the nature of its business, for properly identifying the 
orders of its customers as segmented orders. Further, the maintenance of written policies and 
procedures would generally: (1) assist a broker-dealer in supervising and assessing its 
compliance with Proposed Rule 615; and (2) assist the Commission and SRO staff in connection 
with examinations and investigations.  
 
Marking segmented orders as such pursuant to paragraphs (e)(2) and (f)(1) of Proposed 
Rule 615 would inform other market participants that the orders must be handled in accordance 
with the requirements of Proposed Rule 615, which, as discussed above, is designed to provide 
competition for individual investor orders in fair and open auctions. 
 
Written policies and procedures established pursuant to Proposed Rule 615(e)(3) would 
help a broker develop a process, relevant to the nature of its business, to ensure that its identity 
will not be disclosed and to support its certification. Further, the maintenance of written policies 
and procedures would generally: (1) assist a broker in supervising and assessing its compliance 
with Proposed Rule 615(e)(3); and (2) assist the Commission and SRO staff in connection with 
examinations and investigations.  
Communication of the certification to the relevant open competition trading center would 
enable the open competition trading center to comply with the requirements of Proposed Rule 

147 
 
615(c)(1) that an auction message disclose the identity of the originating broker for a segmented 
order, unless the originating broker has made the requisite certification.
269
 
 
To qualify as an open competition trading center, an NMS Stock ATS would be required 
to permit any registered broker-dealer (other than a broker-dealer subject to a statutory 
disqualification) to become a subscriber of the NMS Stock ATS, and must provide equal access 
among all subscribers of the NMS Stock ATS.
270
 These requirements are designed to help ensure 
a level playing field regarding Proposed Rule 615 for competition among NMS Stock ATSs and 
national securities exchanges, in light of the different regulatory regimes for each. Similar to the 
requirements for national securities exchanges, under Proposed Rule 600(b)(64)(ii)(D), NMS 
Stock ATSs could exclude a registered broker-dealer, or impose conditions on a broker-dealer 
becoming a subscriber, that does not meet certain standards of financial responsibility or 
operational capability, but may only do so pursuant to written policies and procedures. While 
national securities exchanges must prescribe rules, consistent with the Exchange Act, for denying 
membership to a broker-dealer, the requirements applicable to NMS Stock ATSs are less 
stringent.
271
 Requiring NMS Stock ATSs to establish written policies and procedures would help 
an NMS Stock ATS to develop a process for identifying registered broker-dealers that should be 
excluded because they do not meet certain standards, and would help level the competitive 
playing field regarding Proposed Rule 615 between NMS Stock ATSs and national securities 
                                                
269
  As discussed above, the disclosure of the identity of the originating broker in an auction message, absent 
the corresponding certification, is designed to help ensure fair competition among auction responders and 
persons that could otherwise trade with the segmented order, while giving originating brokers a choice as to 
whether or not to disclose their identity. Supra section IV.C.1. 
270
  Supra section IV.B.2. 
271
  Id. 

148 
 
exchanges. Further, the written policies and procedures would generally: (1) assist an NMS 
Stock ATS in supervising and assessing its compliance with the access requirements of proposed 
Rule 600(b)(64)(ii)(D); and (2) assist the Commission and SRO staff in connection with 
examinations and investigations. 
C. Respondents 
A summary of the Commission’s initial estimates of the number of respondents for each 
collection of information requirement is set forth below: 
  

149 
 
 
Collection of Information - Order Competition Rule 
Description of Burden Rule Applicable Respondents Number of 
Respondents 
Dissemination of Auction 
Messages 
Rule  
615(c)(1) 
National securities 
exchanges operating 
qualified auctions 
6 
National securities 
associations 
1 
NMS Stock ATSs 
operating qualified 
auctions  
3 
Total 10 
Policies and Procedures to Identify 
Segmented Orders 
Rule 
615(e)(1) 
Originating broker-dealers 
with responsibility for 
identifying segmented 
orders 
157 
Identification of Segmented Orders 
by Originating Brokers 
Rule 
615(e)(2) 
Originating broker-dealers 
with responsibility for 
identifying segmented 
orders 
157 
Marking of Segmented Orders 
   
Marking of Segmented Orders 
by Originating Brokers 
Rule 
615(e)(2) 
Originating broker-dealers 
with responsibility for 
marking segmented orders 
157 
Marking of Segmented Orders 
by Broker-Dealers 
Rule 
615(f)(1) 
Broker-dealers that route 
orders identified as 
segmented orders  
25 
 
Total 182 
Policies and Procedures for Rule 
615(c) Certification 
Rule 
615(e)(3) 
Originating broker-dealers 
certifying that they 
established, maintained, 
and enforced policies and 
procedures reasonably 
designed to assure that 
their identity will not be 
disclosed 
20 
NMS Stock ATS Policies and 
Procedures to Exclude Subscribers 
Rule 
615(d)(1) 
NMS Stock ATSs 
operating qualified 
auctions that may exclude 
subscribers 
3 
 

150 
 
 
As discussed above,
272
 the open competition trading centers that would be required to 
provide auction messages for dissemination in consolidated market data pursuant to paragraph 
(c)(1) of Proposed Rule 615 would be national securities exchanges and NMS Stock ATSs that 
meet certain requirements and are eligible to operate qualified auctions for segmented orders. As 
is currently the case for quotation and trading information in NMS stocks, auction information 
would be provided by national securities exchanges and FINRA, as the only national securities 
association, to the SIPs for dissemination in consolidated market data.
273
 
Given that all national securities exchanges already have systems and processes for 
providing information for dissemination in consolidated market data as well as systems and 
processes for disseminating certain auction information,
274
 the Commission estimates that it is 
likely that 6 of the 16 national securities exchanges that trade NMS stocks would choose to 
qualify as open competition trading centers and operate qualified auctions. Of the 16 registered 
national securities exchanges currently trading NMS stocks,
275
 12 are part of one of 3 corporate 
affiliate groups, and the Commission estimates that one of the national securities exchanges from 
each of the three corporate groups would likely choose to operate qualified auctions.
276
 Of the 
                                                
272
  Supra section IV.B.2. 
273
  Supra sections III.B.1 and IV.C.1. 
274
  Supra section IV.B.1. In addition to providing consolidated market data, national securities exchanges also 
sell their individual proprietary market data products, and their depth of book (“DOB”) products typically 
include, among other things, information about orders participating in auctions, including auction order 
imbalances. See, e.g., Nasdaq Rule 123(a)(1)(B) available at 
https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%207#section_123_nasdaq_dept
h-of-book_data (defining Nasdaq’s “Nasdaq TotalView” data product); and https://www.nyse.com/market-
data/real-time/integrated-feed (describing NYSE’s “NYSE Integrated” data product). 
275
  Supra note 82 and accompanying text. 
276
  CBOE Holdings, Inc. is the parent company of Cboe BYX, Cboe BZX, Cboe EDGA, and Cboe EDGX; 
Nasdaq, Inc. is the parent company of Nasdaq BX, Nasdaq PhlX, and Nasdaq; Intercontinental Exchange, 
Inc. is the parent company of NYSE, NYSE American, NYSE Arca, NYSE CHX, and NYSE National. 

151 
 
four other national securities exchanges that currently trade NMS stocks, the Commission 
estimates that three exchanges would likely choose to operate qualified auctions.
277
 
The Commission also estimates that some, but not all NMS Stock ATSs would chose to 
operate qualified auctions for segmented orders. One of the requirements of Proposed Rule 615 
is that an open competition trading center must meet the definition set forth in Proposed Rule 
600(b)(64), which would require that an NMS Stock ATS permit any registered broker or dealer 
(other than a broker or dealer subject to a statutory disqualification) to become a subscriber and 
provide equal access among all subscribers. To qualify as an open competition trading center, 
Proposed Rule 600(b)(64) would also require an NMS Stock ATS to display quotations through 
an SRO display-only facility and operate as an automated trading center that displays automated 
quotations disseminated in consolidated market data. Given that NMS Stock ATSs often 
differentiate between groups or classes of subscribers with respect to access to services and most 
have adopted a “dark” trading model,
278
 of the 32 NMS Stock ATSs, the Commission estimates 
that approximately three are likely to make the business model modifications necessary to meet 
the open competition trading center definition and be eligible to operate qualified auctions.
279
 
                                                
277
  The remaining four national securities exchanges that trade NMS stocks are IEX, LTSE, MEMX, and 
MIAX PEARL, which is a subsidiary of MIAX International Holdings, Inc. Of these, based on examination 
of data related to national securities exchanges, for the month ended Nov. 30, 2022, only LTSE did not 
report more than 1% of share volume in NMS stocks. Proposed Rule 600(b)(64) requires a national 
securities exchange to have had an average daily share volume for NMS stocks of 1% or more during at 
least four of the preceding 6 calendar months to qualify as an open competition trading center eligible to 
operate a qualified auction. See Cboe, U.S. Historical Market Volume Data, available at: 
https://cboe.com/us/equities/market_statistics/historical_market_volume/. 
278
  NMS Stock ATSs must publicly disclose information about their trading system and services, including 
differences in access, on Form ATS-N. Links to Form ATS-N filings are available on the Commission’s 
website at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm. See also ATS-N Adopting 
Release, supra note 159, 83 FR at 38886 n.1292 and accompanying text (discussing the dark trading model 
adopted by most NMS Stock ATSs). 
279
  The Commission bases this estimate on the following considerations. While currently no NMS Stock ATS 
would qualify as an Open Competition Trading Center, there is currently one NMS Stock ATS that 
discloses that it crosses the 5% volume threshold for fair access under Regulation ATS for securities that 

152 
 
As discussed above, broker-dealers provide certain NMS stock information to FINRA 
through its facilities, and FINRA provides information for dissemination in consolidated market 
data. To qualify as open competition trading centers, the three NMS Stock ATSs would have 
systems and processes in place to display quotations disseminated in consolidated market data. 
These ATSs would provide auction message information to FINRA, and FINRA would transmit 
the information for dissemination in consolidated market data. 
The Commission requests comment on its estimates of the number of exchanges and 
NMS Stock ATSs that would become open competition trading centers operating qualified 
auctions, including whether the estimates should be lower or higher.  
 
As discussed above, Proposed Rule 615 would impose certain obligations on originating 
brokers, and all other broker-dealers, with respect to their handling of segmented orders. 
Proposed Rule 600(b)(69) defines “originating broker” to mean any broker with responsibility 
for handling a customer account,
280
 and Proposed Rule 600(b)(91) defines “segmented order” as 
an order for the account of a natural person (or an account held on behalf of a natural person or 
group of related family members) that meets certain trading volume thresholds.
281
 Most 
segmented orders are handled by large, customer-facing broker-dealers that accept orders from 
customers and then route these orders to various execution centers. Also, as discussed above, in 
                                                
are available for trading on its platform. This NMS Stock ATS may choose to make the necessary 
modifications to operate as an Open Competition Trading Center. In addition, given the low-cost nature of 
segmented order flow that is likely to be attractive to market participants, the Commission estimates that 
two additional NMS Stock ATSs would choose to make the necessary modifications to operate as Open 
Competition Trading Centers. 
280
  Supra section IV.B.4. 
281
  Supra section IV.B.1. 

153 
 
section IV.B.4, broker business practices can vary widely in terms of how customer accounts are 
handled, with some brokers performing the entire function internally and others allocating 
various responsibilities of an originating broker to other brokers-dealers such as carrying or 
clearing brokers. Those originating brokers who have been assigned responsibilities that include 
the transmission of orders for execution would need to identify and mark segmented orders as 
such to comply with Proposed Rule 615.
282
  
Based on FOCUS Report data,
283
 the Commission estimates that as of June 30, 2022 
there were 3,498 registered broker-dealers,
284
 and of these there were 157 reporting that they 
carry public customer accounts
285
 that would likely be subject to the requirements of paragraphs 
(e)(1) and (2) of Proposed Rule 615.  
Paragraph (f)(1) of Proposed Rule 615 would also require every broker-dealer that 
receives a segmented order and routes that order to identify the order as such. This would include 
broker-dealers that act as wholesalers that would be required to route a segmented order to be 
exposed in a qualified auction at a price prior to executing it, or that route the order to another 
execution center; and any other broker-dealer, including originating broker-dealers assigned 
responsibilities that include identifying and marking orders, that routes segmented orders. The 
                                                
282
  Supra section IV.B.4. 
283
  FOCUS Reports, or “Financial and Operational Combined Uniform Single” Reports, are monthly, 
quarterly, and annual reports that broker-dealers are generally required to file with the Commission and/or 
SROs pursuant to Exchange Act Rule 17a-5. See 17 CFR 240.17a-5. 
284
  The data is obtained from FOCUS Reports, Part II filed for the second quarter of 2022. 
285
  Information on the number broker-dealers that carry public customer accounts is from broker-dealers’ 
responses on their most recently available FOCUS Report Form X-17A-5 Schedule I. Because “public 
customer accounts” may hold orders other than segmented orders, for example institutional customers 
would also fall within the definition of “public customer” for purposes of FOCUS Report Form X-17A-5 
Schedule I, 157 is likely an overestimate.  

154 
 
Commission estimates that approximately 25 broker-dealers that do not also carry customer 
accounts would route retail orders.
286
 
 
As discussed above, the Commission estimates that there are 157 originating brokers that 
would be required to establish, maintain, and enforce written policies and procedures reasonably 
designed to identify customer orders as segmented orders pursuant to paragraph (e)(1) of 
Proposed Rule 615. While there are additional broker-dealers, such as introducing brokers, that 
would meet the definition of “originating broker,” only those broker-dealers carrying customer 
accounts are likely to have been allocated responsibility for routing orders and therefore would 
have burdens and costs associated with implementing the requirements of paragraph (e)(1) of 
Proposed Rule 615. 
The Commission requests comment on whether its estimate of the number of brokers that 
would fall within the scope of Proposed Rule 615(e)(1), including whether the estimate should 
be higher or lower.  
 
As discussed above, the Commission estimates that there would be 157 originating 
brokers that would be required to identify segmented orders as such prior to routing those orders 
pursuant to Proposed Rule 615(e)(2). Additionally, the Commission estimates that there would 
be an additional 25 broker-dealers that route customer orders, and would not also be originating 
brokers in the scope of paragraph (e)(2), that would be required, pursuant to Proposed Rule 
                                                
286
  This estimate is based broker-dealers’ responses on their most recently available FOCUS Report Form X-
17A-5 Schedule I, showing that there are 25 broker-dealers that effect public customer transactions in 
equity securities on a national securities exchange or OTC that do not carry public customer accounts. 

155 
 
615(f)(1) to identify any segmented orders received as such, when routing the order to a routing 
destination.  
The Commission requests comment on its estimate of the number of broker-dealers that 
would fall within the scope of paragraphs (e)(2) and (f)(1) of Proposed Rule 615, including 
whether the estimate should be higher or lower.  
 
It is likely that most originating brokers with segmented orders would choose to be 
identified as the originating broker of a segmented order because that information would be used 
by market participants to help predict the level of adverse selection costs associated with order 
flow from a given originating broker. Thus, originating brokers known to be associated with 
lower adverse selection costs would likely want auction responders to know their identity. Based 
on a review of data related to broker-dealers, the Commission estimates that there are 
approximately 1,267 broker-dealers that would meet the definition of “originating broker” and 
that have responsibility for monitoring customer accounts.
287
 These broker-dealers would be 
required to maintain the policies and procedures required by paragraph(e)(3) of Proposed Rule 
615 if they choose not to have their identity disclosed in auction messages. While it is very 
difficult for the Commission to know how many originating brokers would choose to certify that 
they established, maintained, and enforced written policies and procedures reasonably designed 
to assure that their identity will not be disclosed to any person that potentially could participate 
                                                
287
  The Commission estimates that there are approximately 157 broker-dealers that carry at least one customer 
account trading in NMS stocks, and 1,110 broker-dealers that introduce at least one customer account 
trading in NMS stocks. The estimate of 157 broker-dealers that carry at least one customer account trading 
in NMS stocks and options is based on the number of broker-dealers that report carrying at least one 
customer account on their 2021 FOCUS Report Form X-17A-5 Schedule I; and the estimate of 1,110 
broker-dealers that introduce at least one customer account trading in NMS stocks and options is based on 
estimates using broker-dealers’ FDIDs identified in CAT data during the 2021 calendar year. As CAT data 
includes information only about NMS stocks and options, broker-dealers that introduce or carry customer 
accounts trading in other assets classes are not included in these numbers.  

156 
 
in the qualified auction or otherwise trade with the segmented order routed by the originating 
broker, the Commission preliminarily estimates that 20 of the 1,267 originating brokers would 
choose not to disclose their identity and would be required to establish, maintain and enforce the 
written policies and procedures required by paragraph (e)(3) of Proposed Rule 615. While 
segmented orders, by definition, are limited to orders for accounts with an average daily number 
of trades in NMS stocks of less than 40 in each of the six preceding months, and thereby likely 
associated with lower adverse selection costs, there may be some broker-dealers that have order 
flow associated with higher levels of adverse selection costs or who have customers or business 
models that preference anonymity.
288
  
As discussed above, the originating broker with responsibility for transmitting orders for 
a customer’s account would likely also mark segmented orders to indicate that the certification 
has been made, and other broker-dealers that receive and route such orders would also need to 
mark such orders accordingly. The same broker-dealers that would mark orders as segmented 
orders pursuant to paragraphs (e)(2) and (f)(1) of Proposed Rule 615, discussed above in section 
VI.C.2.b, would also likely mark orders, as applicable, to communicate the certification to the 
open competition trading center. 
The Commission requests comment on its estimate of the number of originating brokers 
that would certify that they have established, maintained, and enforced written policies and 
procedures reasonably designed to assure that the identity of the originating broker will not be 
disclosed, including whether the estimate should be higher or lower. The Commission also 
requests comment on whether it is reasonable to estimate that such certifications would be 
                                                
288
  These broker-dealers are likely to be larger broker-dealers that have customers who are more informed 
traders. Lower-volume broker-dealers with fewer orders are not likely to have this type of customer. 

157 
 
communicated to open competition trading centers via order marking and that the same broker-
dealers that would mark orders as segmented orders would also mark orders for the purpose of 
communicating such certifications to the open competition trading centers operating qualified 
auctions.  
 
As discussed above, of the 32 NMS Stock ATSs, the Commission estimates that 
approximately 3 would operate qualified auctions. To do so, those NMS Stock ATSs would need 
to meet the definition of open competition trading center, and as such, would be required to have 
written policies and procedures to prohibit any registered broker or dealer from being or 
becoming a subscriber, or impose conditions upon a such a subscriber, that does not meet the 
standards of financial responsibility or operational capability of the NMS Stock ATS. The 
Commission anticipates that all three NMS Stock ATSs operating qualified auctions would have 
standards for financial responsibility or operational capability for their subscribers.
289
 
The Commission requests comment on whether its estimate that all NMS Stock ATSs 
operating qualified auctions would have standards for financial responsibility or operational 
capability for their subscribers is reasonable.  
D. Burdens 
 
As discussed above, the estimated six national securities exchanges operating as open 
competition trading centers operating qualified auctions would be required to collect and provide 
the information necessary to generate auction messages in consolidated market data. These 
entities currently operate auctions for which messages are disseminated in their proprietary data 
                                                
289
  This estimate is based on a review of NMS Stock ATS disclosures on Form ATS-N. 

158 
 
feeds, and already provide other information regarding NMS stocks for dissemination in 
consolidated market data. The auction messages would be a new data element that the national 
securities exchanges would have to make available for inclusion in the dissemination of 
consolidated market data. Because the national securities exchanges currently collect and 
calculate data necessary to generate other elements of consolidated market data, and also 
currently provide auction information to subscribers of proprietary data, the requirements of Rule 
615(c)(1) would likely impose minimal initial and ongoing burdens on these respondents, 
including any changes to their systems. 
The Commission estimates that a national securities exchange would require an average 
of 220 initial burden hours of legal, compliance, information technology, and business operations 
personnel time to prepare and implement a system to collect and provide the information 
necessary to generate auction messages for dissemination in consolidated market data, at a 
monetized cost per exchange of $78,580.
290
 And each national securities exchange would incur 
an annual average burden on an ongoing basis of 336 hours to collect and provide auction 
messages, at a monetized cost per exchange of $118,560.
291
 
Proposed Rule 615(c)(1) would also require auction messages initiating qualified 
auctions held on NMS Stock ATSs operating as open competition trading centers to be provided 
                                                
290
  The Commission estimates the monetized initial burden for this requirement to be $78,580: (Compliance 
Manager at $344 for 105 hours) + (Attorney at $462 for 70 hours) + (Sr. Systems Analyst at $316 for 20 
hours) + (Operations Specialist at $152 for 25 hours) = 220 initial burden hours, at a monetized cost of 
$78,580. Throughout this section VI.D, the Commission derived estimates for in-house personnel costs on 
per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, 
modified to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits and overhead. 
291
  The Commission estimates the monetized ongoing, annual burden for this requirement to be $118,560: 
(Compliance Manager at $344 for 192 hours) + (Attorney at $462 for 48 hours) + (Sr. Systems Analyst at 
$316 for 96 hours) = 336 initial burden hours, at a monetized cost of $118,560. 

159 
 
for dissemination in consolidated market data. As discussed above, like national securities 
exchanges, FINRA already collects information from broker-dealers for dissemination in 
consolidated market data, and the addition of auction message information as a new data element 
would impose approximately the same burdens and costs on FINRA as for national securities 
exchanges.
292
 
 To qualify as an open competition trading center eligible to operate qualified auctions, an 
NMS Stock ATS would need to display quotations through an SRO display-only facility in 
compliance with Rule 610(b); display automated quotations disseminated in consolidated market 
data pursuant to Rule 603(b);
293
 and provide trade reports identifying the NMS Stock ATS as the 
venue of execution that are disseminated in consolidated market data pursuant to Rule 603(b).
294
 
These ATSs would need to have systems in place to collect and calculate such information and 
transmit the information to FINRA for dissemination in consolidated market data. It is likely that 
NMS Stock ATSs that run qualified auctions would be operated by large, sophisticated broker-
dealers that have in place systems that could be modified to collect and disseminate auction 
message information. The Commission estimates that the burdens and costs to these NMS Stock 
ATSs to modify their systems to also provide auction information for dissemination in 
consolidated data would be minimal, and would be the same as those for national securities 
exchanges and FINRA.
295
 
                                                
292
   Supra notes 290 and 291. 
293
  The requirements of Rule 610(b) for trading centers that choose to display quotations in NMS stock are 
existing requirements under Regulation NMS, and the requirements of Rule 603(b) pertaining to the display 
of quotations from trading centers that qualify as automated trading centers, are existing requirements that 
are not modified by Proposed Rule 615 and the proposed new definitions under Rule 600 and do not 
constitute new collections of information. 
294
   Proposed Rule 600(b)(64)(ii). 
295
   Supra notes 290 and 291. 

160 
 
 The Commission estimates the initial total aggregate burden and cost for all 10 
respondents would be 2,220 hours, at a monetized cost of $785,800,
296
 and the ongoing total 
burden and cost would be 3,360 hours, at a monetized cost of $1.12 million.
297
 
 A summary of the initial and ongoing burdens and costs described above is set forth 
below: 
Total Estimated Burden Associated With Providing Auction Messages In Consolidated 
Market Data 
 
Respondents Burden 
Hours per 
Respondent 
Aggregate 
Burden Hours 
Monetized 
Cost per 
Respondent 
Aggregate 
Monetized 
Cost 
Total Initial 
Burden 
10 220 2,220 $78,580  $785,800  
Total Ongoing 
Burden 
10 336 3,360 $118,560  $1,185,600  
 
 The Commission requests comment on whether there would be different or additional 
burdens or costs for open competition trading centers to provide the information necessary to 
generate auction messages in consolidated market data. The Commission also requests comment 
on whether the burdens and costs for NMS Stock ATSs to provide the information necessary to 
generate auction messages in consolidated market data would be different from those for national 
securities exchanges.  
                                                
296
  The Commission estimates the monetized ongoing, annual burden for this requirement to be $785,800: 
$78,580 x (6 national securities exchange + 1 registered securities association + 3 NMS stock ATSs) = 
$785,800. 
297
  The Commission estimates the monetized ongoing, annual burden for this requirement to be $1,185,600: 
$118,560 x (6 national securities exchange + 1 registered securities association + 3 NMS stock ATSs) = 
$1,185,600. 

161 
 
 
 
As discussed above, the 157 broker-dealers that would need to identify and mark orders 
to comply with paragraphs (e)(1) and (e)(2) of Proposed Rule 615 likely already would have 
policies and procedures to classify orders for compliance with SRO rules and other regulatory 
requirements, and would have access to the information that would enable them to identify 
orders as being for the account of a natural person or a group of related family members and to 
monitor the level of trading activity in the accounts of their customers, as well as systems and 
processes for marking orders.
298
 For example, these broker-dealers either themselves collect data 
from their customers, or receive such information through an introducing broker for whom they 
are providing services. These broker-dealers will also be familiar with how to adapt their systems 
and processes to identify which customer accounts meet the proposed volume requirements that 
would cause their orders to meet the definition of segmented order in Proposed Rule 600(b)(89) 
and to accommodate the new order marks.  
While most broker-dealers likely have capabilities to identify the characteristics of their 
customers’ orders that would be necessary to identify orders as segmented orders, they would not 
have written policies and procedures regarding the identification of segmented orders, which 
would be a new classification for a subset of customer orders, as would be required by Proposed 
Rule 615(e)(1). The Commission estimates that, to initially comply with this obligation, broker-
dealers would employ a combination of in-house and outside legal and compliance counsel to 
update existing policies and procedures.  
  
                                                
298
  Supra section IV.B.1 (discussing the definition of segmented order, which is designed to facilitate 
compliance and minimize the costs of compliance) and note 253 and accompanying text.  

162 
 
Initial Burdens and Costs 
The Commission estimates that each of the 157 broker-dealers that would be subject to 
the collection of information under Proposed Rule 615(e)(1) would incur an initial average 
internal burden of 40 hours for in-house legal and 10 hours for in-house compliance counsel to 
update existing policies and procedures to comply with paragraph (e)(1) of Proposed Rule 615, 
and an initial in-house burden of 5 hours each for a General Counsel and a Chief Compliance 
Officer to review and approve the updated policies and procedures, for a total of 60 burden 
hours, at a monetized cost of $28,800.
299
 In addition, the Commission estimates a cost of $4,960 
for outside counsel to review the updated policies and procedures on behalf of a broker-dealer.
300
 
The Commission therefore estimates the aggregate initial burden for originating brokers to be 
9,420 burden hours
301
 at a monetized cost of $4.52 million,
302
 and the aggregate initial cost for 
outside counsel to be $778,720 to establish policies and procedures as required by Proposed Rule 
615(e)(1).
303
  
  
                                                
299
  The Commission estimates the monetized initial burden for this requirement to be: (Attorney at $462 for 40 
hours) + (Compliance Counsel at $406 for 10 hours) + (Deputy General Counsel at $663 for 5 hours) + 
(Chief Compliance Officer at $589 for 5 hours) = 60 initial burden hours and a monetized cost of $28,800. 
300
  The Commission’s estimates of the relevant wage rates for outside legal services takes into account staff 
experience, a variety of sources including general information websites, and adjustments for inflation. The 
Commission estimates that the average hourly rate for legal services is $496/hour. This cost estimate is 
therefore based on the following calculation: (10 hours of review) x ($496/hour for outside counsel service) 
= $4,960 in outside counsel costs. 
301
  This estimate is based on the following calculation: (60 burden hours of review per broker-dealer) x (157 
broker-dealers) = 9,420 aggregate burden hours. 
302
  This estimate is based on the following calculation: ($28,800 per broker-dealer) x (157 broker-dealers) = 
$4,521,600. 
303
  This estimate is based on the following calculation: ($4,960 for outside costs per broker-dealer) x (157 
broker-dealers) = $778,720 in outside counsel costs. 

163 
 
Ongoing Burdens and Costs 
The Commission estimates that broker-dealers would review and update their policies 
and procedures for compliance with Proposed Rule 615 on an annual basis, and that they would 
perform the review and update using in-house personnel. The Commission estimates that each 
broker-dealer would annually incur an internal burden of twelve hours to review and update 
existing policies and procedures of 4 hours for legal personnel, 4 hours for compliance 
personnel, and 4 hours for business-line personnel at a monetized cost of $4,476.
304
 The 
Commission therefore estimates an ongoing, aggregate burden for broker-dealers of 1,884 hours, 
at a monetized cost of $702,732.
305
  
  
                                                
304
  The Commission estimates the monetized ongoing, annual burden for this requirement to be: (Attorney at 
$462 for 4 hours) + (Compliance Counsel at $406 for 4 hours) + (Intermediate Business Analyst at $251 for 
4 hours) = 12 ongoing burden hours and $4,476. 
305
  These estimates are based on the following calculations: (12 burden hours per broker-dealer) × (157 broker-
dealers) = 1,884 aggregate ongoing burden hours; and $4,476 per broker-dealer x 157 broker-dealers = 
$702,732. 

164 
 
A summary of the initial and ongoing burdens and costs described above is set forth 
below: 
Total Estimated Outside Costs to Establish Policies and Procedures to Identify Segmented 
Orders 
 
Respondents Outside Cost per Respondent  Aggregate Outside Cost 
Total Initial 
Outside Costs 
157 $4,960  $778,720  
 
Total Estimated Burden to Establish and Maintain Policies and Procedures to Identify 
Segmented Orders 
 
Respondents Burden 
Hours per 
Respondent 
Aggregate 
Burden Hours 
Monetized 
Cost per 
Respondent 
Aggregate 
Monetized Cost 
Total 
Initial 
Burden 
157 60 9,420 $28,800  $4,521,600 
Total 
Ongoing 
Burden 
157 12 1,884 $4,476  $702,732  
 
The Commission requests comment on whether there would be different or additional 
burdens or costs for originating brokers to establish and maintain written policies and procedures 
to identify segmented orders.  
 
As discussed above, the Commission estimates that there are 157 broker-dealers that 
would need to mark segmented orders as such to comply with paragraph (e)(2) of Proposed Rule 
615, and an additional 25 broker-dealers that would not be required to comply with the marking 

165 
 
requirements of paragraph (e)(2) of Proposed Rule 615, but would be required to mark orders 
prior to routing as required by paragraph (f)(1) of Proposed Rule 615.
306
 
Initial burdens and Costs 
For purposes of complying with Proposed Rule 615(e)(2), for an originating broker to 
identify whether a customer order meets the definition of “segmented order” and must be marked 
accordingly, a broker-dealer would first need to establish mechanisms to proactively and 
systematically identify which orders for NMS stocks are for the account of customers that are 
natural persons or held in a legal form on behalf of a natural person or group of related family 
members; and of those, which are orders for an account in which the average daily number of 
trades in NMS stocks was less than 40 in each of the six preceding months.
307
 For purposes of 
this analysis, and as discussed above, the Commission believes that most broker-dealers already 
collect information about their customers’ accounts, or receive information about customer 
accounts from an introducing broker, and would already have an existing technological 
infrastructure in place, and the Commission assumes that such infrastructure would need to be 
modified to effect compliance with Proposed Rule 615.  
Acknowledging that costs and burdens may vary greatly according to the size or 
complexity of the broker-dealer and that some broker-dealers would implement the changes in-
house, while others would engage a third party vendor. The Commission estimates that 
approximately one third of the 157 broker-dealers (or 52) would implement the changes in-
house, while the remaining 105 would engage a third-party vendor. The Commission expects 
                                                
306
  As discussed above, these broker-dealers would also mark orders, as applicable, to communicate that an 
originating broker certifies that it established, maintained, and enforced the requisite policies and 
procedures to assure that its identity would not be disclosed. 
307
  Supra sections IV.B.1 and IV.E.  

166 
 
that the modification of a broker-dealer’s existing technology performed in-house would require 
260 hours at a monetized cost of $95,480.
308
 The Commission estimates that the burden for a 
broker-dealer engaging a third-party to implement the modifications would be 50 hours at a 
monetized cost of $18,385,
309
 and $35,000 for the third-party service provider to perform the 
necessary work.
310
 The aggregate burden for those broker-dealers to modify existing technology 
to identify segmented orders that perform the modification in-house would therefore be 13,520 
burden hours, at a monetized cost of $4,964,960;
311
 and the aggregate costs and burdens for those 
broker-dealers employing a third-party service provider would be $3,675,000
312
 and 5,250 
burden hours, at a monetized cost of $1,930,425.
313
  
For purposes of compliance with Proposed Rule 615(f)(1), a segmented order received by 
a routing broker-dealer would already have been identified as such by the originating broker 
pursuant to Proposed Rule 615(e)(2). Like originating broker-dealers, these 25 broker-dealers, 
would however, need to modify their systems to enable them to mark orders as segmented orders 
prior to routing such orders to a routing destination.  
                                                
308
  The Commission estimates the monetized initial burden for this requirement to be: (Sr. Programmer at 
$368 for 160 hours) + (Sr. Database Administrator at $379 for 40 hours) + (Sr. Business Analyst at $305 
for 40 hours) + (Attorney at $462 for 20 hours) = 260 initial burden hours and a monetized cost of $95,480. 
309
  The Commission estimates the monetized initial burden for this requirement to be: (Sr. Business Analyst 
for 15 hours at $305 per hour) + (Compliance Manager for 20 hours at $344 per hour) + (Attorney for 15 
hours at $462 per hour) = 50 initial burden hours at a monetized cost of $18,385. 
310
  The Commission’s estimate is based on prior estimates for the cost of systems modifications to capture 
additional order handling information. Securities Exchange Act Release No. 84528 (Nov. 2, 2018 ) 83 FR 
58338 (Nov. 19, 2018) at 58383, n.492 and accompanying text. 
311
  This cost estimate is based on the following calculation: (260 initial burden hours at a monetized cost of 
$95,480) x (52 broker-dealers) = 13,520 initial burden hours and a monetized cost of $4,964,960. 
312
  This cost estimate is based on the following calculation: ($35,000 in third-party service provider costs per 
broker-dealer) x (105 broker-dealers) = $3,675,000 in aggregate outside third-party provider costs. 
313
  The Commission estimates the aggregate monetized initial burden for this requirement to be: (50 initial 
burden hours at a monetized cost of $18,385) x (105 broker-dealers) = 5,250 initial burden hours and a 
monetized cost of $1,930,425. 

167 
 
 The Commission estimates that the 157 originating brokers and the additional 25 routing 
broker-dealers would each incur ongoing burdens to mark orders as “segmented orders” (and as 
applicable to communicate an originating broker’s certification), which are discussed further 
below, as well as initial, one-time technology project costs to update their existing order marking 
systems. The Commission estimates the initial one-time technology project costs for originating 
brokers to add the “segmented order” and certification marks to their existing marking systems to 
comply with paragraph (e)(2) of Proposed Rule 615, and the initial one-time technology project 
costs for routing broker-dealers to add the “segmented order” and certification marks to their 
existing marking systems to comply with paragraph (f)(1) of Proposed Rule 615, to be $170,000 
per broker-dealer,
314
 for a an aggregate total cost of $30.94 million.
315
 
Ongoing Burdens and Costs 
The Commission estimates that a total of approximately 2.2 billion “segmented orders” 
would be entered annually.
316
 This would make the average number of annual “segmented order” 
order marks by each of the 182 broker-dealers to be 11.9 million.
317
 Each instance of marking an 
order as a “segmented order,” and as applicable to communicate that an originating broker has 
                                                
314
  This estimate is based on industry sources of the cost to program systems to add a new marking 
classification and adjusted for inflation. See, e.g., Securities Exchange Act Release No. 94313 (Feb. 25, 
2022), 87 FR 14950, 14976 (Mar. 16, 2022) (proposing amendments to Regulation SHO) (“Regulation 
SHO Amendment Proposal”). 
315
  This cost estimate is based on the following calculation: ($170,000 system project costs per broker-dealer) 
x (157 originating broker-dealers + 25 routing broker-dealers) = $30,940,000 in aggregate system project 
costs. 
316
  This estimate is based on CAT data for individual investor stock orders handled by wholesalers during Q1 
2022. See Tables 7 and 10, infra, sections VII.B.4 and VII.B.5 (showing a total of approximately 
271,310,000 orders handled during the period). Because as discussed in section VII.B.4 below, this number 
excludes certain orders, it likely significantly understates the total number of individual investor orders 
handled by wholesalers. We have therefore doubled the number for purposes of our estimate, and 
multiplied by four to arrive at an estimated annual number of segmented orders of 2,170,480,000.  
317
  This figure was calculated as follows: 2,170,480,000 “segmented orders” orders requiring order marking 
divided by 182 broker-dealers. 

168 
 
certified that it has established, maintained, and enforced the requisite policies and procedures to 
assure that its identity will not be disclosed, is estimated to take between approximately 
0.00001158 and 0.000139 hours (0.042 and 0.5 seconds) to complete.
318
 Thus, it would take each 
of the 182 broker-dealers between approximately 138 to 1,658 hours to mark segmented orders 
annually;
319
 and the Commission estimates the aggregate burden to be between approximately 
25,134 and 301,697 hours.
320
 This estimate is based on a number of factors, including: 
previously estimated burdens for the current marking requirements of other Federal securities 
rules and regulations;
321
 that broker-dealers should already have the necessary mechanisms and 
procedures in place and already be familiar with processes and procedures to comply with other 
marking requirements under Federal securities rules and regulations (such as the requirements of 
Rule 200(g) of Regulation SHO); and that broker-dealers should be able to continue to use the 
same or similar mechanisms, processes and procedures to comply with Proposed Rule 615. 
                                                
318
  The upper end of this estimate – 0.5 seconds – is based on the same time estimate for marking sell orders 
“long” or “short” under Rule 200(g) of Regulation SHO. See Regulation SHO Amendment Proposal, supra 
note 314, 87 FR at 14975 (citing Securities Exchange Act Release No. 50103 (July 28, 2004), 69 FR 
48008, 48023 (Aug. 6, 2004) (“Regulation SHO Adopting Release”). See also Securities Exchange Act 
Release No. 48709 (Oct. 28, 2003) 68 FR 62972, 63000 n. 232 (Nov. 6, 2003) and Securities Exchange Act 
Release No. 59748 (Apr. 10, 2009), 74 FR 18042, 18089 (Apr. 20, 2009) (providing the same estimate – 
0.5 seconds – for marking sell orders “short exempt” under Rule 200(g) of Regulation SHO)). The lower 
end of this estimate – 0.042 seconds – is based on a Commission estimate that computing speeds are twelve 
times faster today than they were in 2007. Regulation SHO Amendment Proposal, supra note 314, 87 FR at 
14975, 15000 (stating that according to an industry performance evaluation for server processors, 
computing speed has increased by at least 12 times since 2007 (the earliest year in the data and citing Year 
on Year Performance (for server processors), PassMark Software Pty. Ltd., available at 
https://www.cpubenchmark.net/year-on-year.html). 
319
  These figures were calculated as follows: (11,925,714 “segmented orders” orders per broker-dealer) x 
(0.00001158 hours) = 138.10 hours; and (11,925,714 “segmented orders” orders per broker-dealer) x 
(0.000139 hours) = 1,657.67 hours. 
320
  These figures were calculated as follows: (2,170,480,000 “segmented orders” orders requiring order 
marking) x (0.00001158 hours) = 25,134.16 hours; and (2,170,480,000 “segmented orders” orders) x 
(0.000139 hours) = 301,696.70 hours. 
321
  See, e.g., Regulation SHO Amendment Proposal, supra note 314, 87 FR at 14975 (discussing estimated 
marking requirements to comply with Rule 200(g) of Regulation SHO which requires broker-dealers to 
mark sell orders “long,” “short,” or “short exempt”). 

169 
 
A summary of the estimated initial and ongoing burdens and costs described above is set 
forth below: 
Total Estimated Initial Burdens and Costs to Identify Segmented Orders 
 
Respondents Burden 
Hours  
Monetized Cost 
per Respondent 
Third-
party 
Cost 
Aggregate 
Burden 
Hours 
Aggregate 
Cost 
Initial 
Burden to 
Modify In-
house 
52 260 $95,480  
 
13,520 $4,964,960  
Initial In-
house 
Burden in 
connection 
with use of 
Third-
party 
105 50 $18,385  
 
5,250 $1,930,425  
Outside 
Costs for 
Third-
party 
Services 
105 
  
$35,000 
 
$3,675,000  
 
Total Estimated Initial System Modification Costs to Mark Segmented Orders 
 Respondents Cost per Respondent Aggregate Cost 
Initial Technology Costs 
182 $170,000 $30,940,000 
 
Total Estimated Ongoing Burden to Mark Segmented Orders 
Originating 
brokers with 
individual 
accounts and 
routing 
brokers 
Annual 
segmented 
orders 
Annual 
segmented 
orders per 
originating 
broker 
Estimated 
burden hours 
per 
segmented 
order 
Total 
annual 
industry 
burden 
hours 
Annual burden 
per originating 
broker 
182 2,170,480,000 11,925,714 0.00001158 
to 
0.000139 
25,134 
to 
301,697 
138.10 
to 
1,657.68 
 

170 
 
The Commission requests comment on whether there would be different or additional 
burdens or costs for brokers to identify and mark segmented orders as such. Would the burdens 
and be lower or higher? Are broker-dealers more likely to perform these function in-house, or 
use third-party service providers? Should the estimated cost to employ a third-party service 
provider be lower or higher?  
 
Those originating brokers that do not want their identity to be disclosed in the auction 
message initiating a qualified auction would be required to establish, maintain and enforce 
written policies and procedures reasonably designed to assure that the identity of the originating 
broker will not be disclosed, directly or indirectly, to any person that potentially could participate 
in the qualified auction or otherwise trade with the segmented order. The Commission believes 
that originating brokers choosing to make certifications referred to in Proposed Rule 
615(c)(1)(iii) would be familiar with how to adapt their systems and processes to assure that the 
identity of the originating broker is not disclosed, in compliance with the requirements of 
Proposed Rule 615(e)(3). The Commission acknowledges that policies and procedures may vary 
greatly by broker-dealer, given the differences in size and the complexity of broker-dealer 
business models. Accordingly, the Commission believes that the need to update policies and 
procedures, as well as the ongoing compliance costs, might also vary greatly.  
Initial Burdens and Costs 
The Commission estimates that there would be 20 broker-dealers that would chose to 
make a Proposed Rule 615(c)(1)(iii) certification. To initially comply with the obligation to 
establish written policies and procedures to comply with Proposed Rule 615(e)(3), broker-dealers 
would employ a combination of in-house and outside legal and compliance counsel to update 
their existing policies and procedures. The Commission estimates that each of these 20 broker-

171 
 
dealers would incur a one-time average internal burden of 40 hours for in-house legal and 10 
hours for in-house compliance counsel to update existing policies and procedures to comply with 
paragraph (e)(3) of Proposed Rule 615, and a one-time burden of 5 hours each for a General 
Counsel and a Chief Compliance Office to review and approve the updated policies and 
procedures, for a total of 60 burden hours.
322
 In addition, the Commission estimates a cost of 
$4,960 for outside counsel to review the updated policies and procedures on behalf of a broker-
dealer.
323
 The Commission therefore estimates the aggregate initial burden for originating 
brokers to be 1,200 burden hours
324
 at a monetized cost of $576,000,
325
 and the aggregate total 
cost for outside counsel to be $99,200 to establish policies and procedures as required by 
Proposed Rule 615(e)(3).
326
  
Ongoing Burdens and Costs 
The Commission estimates that broker-dealers would review and update their policies 
and procedures for compliance with Proposed Rule 615 on an annual basis, and that they would 
perform the review and update using in-house personnel. The Commission estimates that each 
broker-dealer would annually incur an internal burden of twelve hours to review and update 
existing policies and procedures: four hours for legal personnel, four hours for compliance 
                                                
322
  The Commission estimates the monetized ongoing, annual burden for this requirement to be: (Attorney at 
$462 for 40 hours) + (Compliance Counsel at $406 for 10 hours) + (Deputy General Counsel at $663 for 5 
hours) + (Chief Compliance Officer at $589 for 5 hours) = 60 initial burden hours and $28,800. 
323
  This cost estimate is based on the following calculation: (10 hours of review) x ($496 per hour for outside 
counsel service) = $4,960 in outside counsel costs. 
324
  This estimate is based on the following calculation: (60 burden hours of review per broker-dealer) x (20 
broker-dealers) = 1,200 aggregate burden hours. 
325
  This estimate is based on the following calculation: ($28,800 per broker-dealer) x (20 broker-dealers) = 
$576,000. 
326
  This estimate is based on the following calculation: ($4,960 for outside costs per broker-dealer) x (20 
broker-dealers) = $99,200 in outside counsel costs. 

172 
 
personnel, and four hours for in-line business personnel, at a monetized cost of $4,476.
327
 The 
Commission therefore estimates an ongoing, aggregate burden for broker-dealers of 
approximately 240 hours
328
 and a monetized cost of $89,520.
329
 The ongoing burden to 
communicate certifications is included with the cost for “segmented order” marking discussed 
above in section VI.D.2.b. A summary of the estimated initial and ongoing burdens and costs 
described above in this section VI.D.3 are set forth below: 
 
Total Estimated Outside Costs to Establish Policies and Procedures Reasonably Designed 
to Assure that the Originating Broker of a Segmented Order will not be Disclosed 
 
Respondents Outside Cost per Respondent Outside Aggregate Cost 
Initial Outside 
Costs 
20 $4,960  $99,200  
 
Total Estimated Burden to Establish and Maintain Policies and Procedures Reasonably 
Designed to Assure that the Originating Broker of a Segmented Order will not be 
Disclosed 
 Respondents 
Burden 
Hours per 
Respondent 
Aggregate 
Burden 
Hours 
Monetized 
Cost per 
Respondent 
Aggregate 
Monetized 
Cost 
Initial 
Burden 
20 60 1,200 $28,800  $576,000 
Ongoing 
Burden 
20 12 160 $4,476 $89,520 
 
The Commission requests comment on whether there would be different or additional 
burdens or costs for originating brokers to establish and maintain written policies and procedures 
                                                
327
  The Commission estimates the monetized ongoing, annual burden for this requirement to be: (Attorney at 
$462 for 4 hours) + (Compliance Counsel at $406 for 4 hours) + (Compliance Counsel at $406 for 4 hours) 
+ (Intermediate Business Analyst at $251 for 4 hours) = 12 ongoing burden hours and $4,476. 
328
  This estimate is based on the following calculation: (12 burden hours of review per broker-dealer) x (20 
broker-dealers) = 240 aggregate burden hours. 
329
  The Commission estimates the monetized ongoing, annual burden for this requirement to be: ($4,476 per 
broker-dealer) x 20 broker-dealers = $89,520. 

173 
 
reasonably designed to assure that its identity will not be disclosed. For example, do brokers 
have existing policies and procedures related to ensuring confidentiality in other contexts that 
could be expanded upon or are there are additional burdens and costs associated with review of a 
broker’s internal systems that should be factored into the Commission’s estimate? Are 
originating broker’s likely to perform the function of establishing and maintaining these policies 
and procedures in-house or would they employ third-party service providers, such as outside 
counsel? Would originating brokers also have costs to modify their internal systems to prevent 
disclosure of the identity of the originating broker in support of a Proposed Rule 615(c)(1)(iii) 
certification or other costs in support of such a certification?  
 
The Commission believes that NMS Stock ATSs – in particular those whose broker-
dealer operators are large, multi-service broker-dealers – generally have,
330
 and likely maintain 
in writing, standards of financial responsibility and operational capability for subscribers to their 
system, and also generally have policies and procedures for admitting new persons as subscribers 
or limiting access to services. NMS Stock ATSs are not, however, currently required to have 
written policies and procedures for granting access to their trading system, unless they meet the 
fair access threshold of Rule 301(b)(5).
331
 NMS Stock ATSs are, however, required to disclose 
on Form ATS-N whether there are any conditions the ATSs requires a person to satisfy to 
become a subscriber and whether there are any limitations on access to services.
332
 The 
Commission therefore estimates that the burdens and cost for an NMS Stock ATS to comply 
                                                
330
  This belief is based on a review of NMS Stock ATS disclosures on Form ATS-N. 
331
  See supra note 214 and accompanying text. As discussed above, currently only one NMS Stock ATS 
discloses that it meets the fair access threshold. Supra section IV.B.2.b. 
332
  See supra note 214. 

174 
 
with Proposed Rule 600(b)(64)(ii)(D) to qualify as an open competition trading center eligible to 
operate a qualified auction pursuant to Proposed Rule 615(d)(1) to be minimal. The Commission 
acknowledges that policies and procedures may vary greatly by NMS Stock ATS, given the 
differences in size and the complexity of business models. Accordingly, the Commission would 
expect that the need to update policies and procedures, as well as the ongoing compliance costs, 
might also vary. As discussed above, the Commission estimates that three NMS Stock ATSs may 
determine to modify their systems to operate as open competition trading centers and operate 
qualified auctions. To comply with this obligation, these NMS Stock ATSs would likely employ 
in-house legal and compliance counsel.
333
 
Initial Burdens and Costs 
For NMS Stock ATSs that have not recorded in writing their policies and procedures to 
prohibit any registered broker or dealer from being or becoming a subscriber, or impose 
conditions upon such a subscriber, that does not meet the standards of financial responsibility or 
operational capability as are prescribed by such written policies and procedures, the Commission 
estimates the initial burden and cost for an NMS Stock ATS that choses to comply with Proposed 
Rule 600(b)(64)(ii)(D) to be minimal. The Commission estimates that the initial burden for an 
NMS Stock ATS to review its existing policies and procedures for consistency with the proposed 
rule, to make modifications as appropriate, and to put the policies and procedures in writing 
                                                
333
  The Commission based its estimate on the burden hour estimate provided in connection with the adoption 
of amendments to Rule 301(b)(10), which as amended requires all ATSs to maintain in writing their 
safeguards and procedures to protect subscribers’ confidential trading information, as well as the oversight 
procedures to ensure such safeguards and procedures are followed. See ATS-N Adopting Release, supra 
note 278, 83 FR at 38868. 

175 
 
would be approximately 8 hours, at a monetized cost of $3,106.
334
 Thus, the Commission 
estimates the aggregate initial burden to be 24 hours, at a monetized cost of $9,318.
335
 
Ongoing Burdens and Costs 
For purposes of this analysis, the Commission has assumed that NMS Stock ATSs would 
review and update their policies and procedures for compliance with Proposed Rule 
600(b)(64)(ii) on an annual basis, and that they would perform the review and update using in-
house personnel. The Commission estimates that each NMS Stock ATS would annually incur an 
internal burden of 8 hours to review and update existing policies and procedures, made up of 
four hours for legal personnel and four hours for compliance personnel, at a monetized cost of 
$2,680.
336
 The Commission therefore estimates an ongoing, aggregate burden for NMS Stock 
ATSs of approximately 24 hours at a monetized cost of $8,040.
337
  
A summary of the estimated initial and ongoing burdens and costs described above is set 
forth below: 
Total Estimated Burden to Establish and Maintain Policies and Procedures to Exclude 
Subscribers Based on Financial Responsibility or Operational Capability Standards 
 
Respondents 
Burden 
Hours per 
Respondent 
Aggregate 
Burden Hours 
Monetized 
Cost per 
Respondent 
Aggregate 
Monetized 
Cost 
Initial Burden  3 
8 24 $3,106  $9,318 
Ongoing 
Burden  
3 8 24 $2,680  $8,040  
                                                
334
  This estimate is based on the following: (Compliance Attorney at $406 for 7 hours) + (Sr. Compliance 
Examiner at $264 for 1 hour) = 8 burden hours and a monetized cost of $3,106. 
335
  These estimates are based on the following calculations: (8 burden hours per NMS Stock ATS) x (3 NMS 
Stock ATSs) = 24 burden hours; and ($3,106 per NMS Stock ATS) x (3 NMS Stock ATSs) = $9,318. 
336
  The Commission estimates the monetized ongoing burden for this requirement to be: (Compliance Attorney 
at $406 for 4 hours) + (Sr. Compliance Examiner at $264 for 4 hours) = 8 initial burden hours and a 
monetized cost of $2,680). 
337
  These estimates are based on the following calculations: (8 burden hours per NMS Stock ATS) x (3 NMS 
Stock ATSs) = 24 burden hours; and at ($2,680 per NMS Stock ATS) x 3 NMS Stock ATSs = $8,040. 

176 
 
 
 The Commission is requesting comment on whether NMS Stock ATSs that would 
operate as open competition trading centers operating qualified auctions would have different or 
additional burdens and costs to maintain written policies and procedures to exclude a broker-
dealer subscriber, or impose conditions on such a subscriber, that does not meet standards of 
financial responsibility and operational capability.  
E. Collection of Information is Mandatory 
The collections of information required by Proposed Rule 615(c)(1) would be mandatory 
for national securities exchanges and NMS Stock ATSs that operate qualified auctions, and the 
one national securities association. The collections of information required by Proposed Rule 
615(e)(1) and (2) would be mandatory for broker-dealers that meet the proposed definition of 
“originating broker.” The collection of information required by Proposed Rule 615(e)(3) would 
be mandatory for originating brokers that communicate a certification to an open competition 
trading center pursuant to Proposed Rule 615(c)(1). The collection of information required by 
Proposed Rule 615(f)(1) would be mandatory for broker-dealers that receive and route 
segmented orders. The collection of information required by Proposed Rule 615(d)(1), in 
conjunction with Proposed Rule 600(b)(64)(ii)(D), would be mandatory for NMS Stock ATSs 
that operate as open competition trading centers and prohibit any broker or dealer from becoming 
a subscriber, or impose conditions upon such a subscriber, based on standards of financial 
responsibility or operational capability.  
F. Confidentiality of Information Collected 
The Commission would not typically receive confidential information as a result of 
Proposed Rule 615 or the related proposed amendments. To the extent that the Commission 

177 
 
receives – through its examination and oversight program, through an investigation, or by some 
other means records or disclosures from a broker-dealer that relate to or arise from Proposed 
Rule 615 or the related amendments that are not publicly available, such information would be 
kept confidential, subject to the provisions of applicable law.
338
 
 
As discussed above, auction messages initiating a qualified auction would be publicly 
disseminated in consolidated market data. These messages would include the identity of the open 
competition trading center, symbol, side, size, limit price, and identify of the originating broker, 
unless the originating broker made the certification specified in paragraph (c)(1)(iii) of Proposed 
Rule 615. 
 
 The identification of an order as a segmented order would be made available to any 
destination to which the order has been routed. The information would also be available to the 
Commission and its staff, and to other regulators. 
 
If an originating broker determines to make a certification referred to in paragraph 
(c)(1)(iii) of Proposed Rule 615, such certification must be communicated to the open 
competition trading center operating the applicable qualified auction, and any interim broker-
dealer routing a segmented order associated with a certification would also need to be made 
aware of the certification for purposes of communicating the certification to the open 
competition trading center. The information would also be available to the Commission and its 
staff, and to other regulators. Also, the originating broker’s written policies and procedures 
                                                
338
  See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing the public availability of information obtained by 
the Commission). 

178 
 
pursuant to Proposed Rule 615(e)(3) would be available to the Commission and its staff, and to 
other regulators. 
 
An NMS Stock ATSs’ written policies and procedures to comply with Proposed Rule 
600(b)(64)(ii)(D), if necessary, to qualify as an open competition trading center eligible to 
operate a qualified auction pursuant to Proposed Rule 615(d)(1) would be available to the 
Commission and its staff, and to other regulators. As described above, NMS Stock ATSs are also 
required to publicly disclose certain information on Form ATS-N.
339
 
G. Retention Period for Recordkeeping Requirements 
Proposed Rule 615 and the related amendments, would not establish any new record 
retention requirements. National securities exchanges and national securities associations are 
required to retain records and information pursuant to 17 CFR 240.17a-1 (“Rule 17a-1”), and 
broker-dealers are required to retain records and information pursuant to 17 CFR 240.17a–4 
(“Rule 17a-4”). 
H. Request for Comments 
The Commission requests comment on whether the estimates for burden hours and costs 
are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (1) 
evaluate whether the proposed collections of information are necessary for the proper 
performance of the functions of the Commission, including whether the information would have 
practical utility; (2) evaluate the accuracy of the Commission’s estimate of the burden of the 
proposed collections of information; (3) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and (4) determine whether there are 
                                                
339
  Supra note 278. 

179 
 
ways to minimize the burden of the collections of information on those who are to respond, 
including through the use of automated collection techniques or other forms of information 
technology. 
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 Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File Number S7-
31-22. 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 S7-31-22 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. 
VII. Economic Analysis 
A. Introduction 
The Commission is mindful of the economic effects that may result from Proposed Rule 
615, and the amendments proposed in this release (the “Proposal”), including the benefits, costs, 
and the effects on efficiency, competition, and capital formation. Exchange Act section 3(f) 
requires the Commission, when it is engaged in rulemaking pursuant to the Exchange Act 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 will promote 

180 
 
efficiency, competition, and capital formation.
340
 In addition, Exchange Act section 23(a)(2) 
requires the Commission, when making rules pursuant to the Exchange Act, to consider among 
other matters the impact that any such rule would have on competition and not to adopt any rule 
that would impose a burden on competition that is not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.
341
 The following economic analysis identifies and considers 
the costs and benefits—including the effects on efficiency, competition, and capital formation—
that may result from the Proposal. 
Investors participate in capital markets to save for the future, to diversify, and to 
maximize returns given a desired level of risk, among other reasons. This participation can 
involve both trades based on information and trades based on liquidity needs. Many individuals 
participate indirectly in equity markets, such as through mutual funds or through pension funds. 
However, many individuals participate directly in equity markets, and this direct participation 
has grown in recent years.
342
 While some of this direct participation may be transitory, forces 
operating over the long run, such as technological improvements, may lead the trend to continue.  
This increase in participation, coming on top of various other trends discussed below, 
motivates concern over the current isolation of retail orders. At present, the vast majority of retail 
orders (over 90% of marketable NMS stock orders) are routed to wholesalers, where they are 
                                                
340
  See 15 U.S.C. 78c(f). 
341
  See 15 U.S.C. 78w(a)(2). 
342
  See, e.g., SIFMA Insights, Gauging the New Normal for Volatility, Volumes, Market Levels & Retail 
Investor Participation (May 2021), available at https://www.sifma.org/wp-
content/uploads/2021/05/SIFMA-Insights-Market-Structure-Survey-FINAL-FOR-WEB.pdf; see also 
Jennifer J. Schulp, GameStop and the Rise of Retail Trading, 41 Cato J. 511 (2021). For example, one 
study estimates that retail market share has increased from around 23% (as a percentage of share volume) 
in Jan. 2020 to around 34% by July 2021; see Rosenblatt Securities, How Can the Buy Side Interact with 
Retail Flow? (Feb. 14, 2022), available at https://www.rblt.com/market-reports/how-can-the-buy-side-
interact-with-retail-flow. 

181 
 
frequently executed in isolation, on a captive basis.
343
 This execution is subject to competitive 
forces that apply at the level of average execution quality. Execution of these orders is not 
subject to order-by-order competition that occurs when order interactions are subject to exchange 
protocols. The empirical analysis below suggests that this results in suboptimal execution quality 
compared to an alternative market structure in which the marketable orders of individual 
investors were subject to order-by-order competition.
344
 While wholesalers generally achieve 
price improvement relative to the NBBO, Commission analysis indicates that there is the 
potential for individual investors to receive additional price improvement in line with the low 
adverse selection risk of individual investor order flow. While acknowledging there is substantial 
uncertainty in the eventual outcome, the Commission estimates that qualified auctions as 
designed by the Proposal would result in additional price improvement for the marketable orders 
of individual investors that could reduce the average transactions costs of these orders by 0.86 
basis points (“bps”) to 1.31 bps.
345
 The Commission estimates that segmented orders that would 
                                                
343
  See analysis in infra Table 3. In the current market structure, retail brokers provide wholesalers with large 
blocks of orders, leaving it to the discretion of wholesalers how to execute each order, consistent with their 
best execution responsibilities. Broker-dealers are required to provide best execution for customer orders, 
both pursuant to common law and FINRA rules. See discussion of broker-dealer best execution 
responsibilities in supra section III.B.2. The obligation for wholesalers to provide best execution is required 
under FINRA Rule 5310 (Best Execution and Interpositioning). See also supra note 133. The Commission 
is also separately proposing a new rule addressing the best execution obligations of broker-dealers. See 
Regulation Best Execution Proposal, supra note 130. The Commission encourages commenters to review 
that proposal to determine whether it might affect their comments on this proposal 
344
  See infra section VII.B.4 for analysis and discussion of the potential adverse execution quality effects from 
the isolation of individual investor marketable orders. 
345
  See analysis in Table 19 and corresponding discussion in infra section VII.C.1.b. This estimate accounts 
only for potential changes in individual order transaction costs and assumes the PFOF wholesalers 
currently pay to retail brokers would be converted into additional price improvement for the individual 
investor order, and does not include costs that may arise in the form of potential increases in (or the return 
of) commissions retail brokers charge to individual investors or other reductions in the services that retail 
brokers currently offer. See infra note 514 for further discussion. 

182 
 
be eligible to be included in qualified auctions could account for 7.3%
346
 to 10.1%
347
 of total 
executed dollar volume. Given this estimate, the Commission preliminarily estimates that the 
Proposal could potentially result in a total average annual savings in individual investor 
transaction costs ranging from $1.12 billion to $2.35 billion.
348
 These estimated gains would be 
generated primarily through increased competition to supply liquidity to marketable orders of 
individual investors, which in turn would lower transaction costs for individual investors, 
potentially enhance order execution quality for institutional investors, and improve price 
discovery. More generally, it would broaden the set of market participants that directly interact 
with individual investor orders of NMS stocks.
349
 For example, Commission analysis indicates 
that there is often liquidity available at the NBBO midpoint on exchanges or NMS Stock ATSs 
when a wholesaler executes the marketable orders of individual investors at prices less favorable 
(for the customer) than the NBBO midpoint.
350
 Qualified auctions would act as a coordination 
mechanism and make the submitters of these resting midpoint orders aware there was an 
individual investor order they could potentially trade with. By increasing competition and 
enhancing the direct exposure of individual investor orders to a broader spectrum of market 
                                                
346
  See infra note 533. 
347
  See infra note 535. 
348
  See analysis in Table 19 and corresponding discussion in infra section VII.C.1.b.  
349
 As discussed above, Proposed Rule 615 covers only NMS stocks, and as such, the economic analysis 
includes quantitative and qualitative analysis of only NMS stocks.  
350
  Commission analysis of CAT data in infra Table 20 found that, on average, 51% of the shares of individual 
investor marketable orders internalized by wholesalers are executed at prices less favorable than the NBBO 
midpoint. Out of these individual investors shares that were executed at prices less favorable than the 
midpoint, on average, 75% of these shares could have hypothetically executed at a better price against the 
non-displayed liquidity resting at the NBBO midpoint on exchanges and NMS Stock ATSs. See infra 
section VII.C.1.b for further discussion on the analysis in Table 20. 

183 
 
participants, the Proposal would help achieve the objectives for an NMS set forth in section 11A 
of the Exchange Act.
351
 
The Proposal could have additional benefits with respect to trading costs, liquidity, and 
capital formation, though the Commission acknowledges that these are uncertain. The large 
percentage of individual investor orders executed off-exchange confers a substantial competitive 
advantage on wholesalers and other market makers with a significant presence both on and off-
exchange, as they observe order flow more quickly and in a more granular fashion than others. 
This advantage contributes to asymmetric information and increased adverse selection on 
exchanges. Such adverse selection may reduce market quality for all participants and may 
ultimately reduce efficiency and lower capital formation.  
The Commission acknowledges considerable uncertainty in the costs that would arise 
from Proposed Rule 615, due to whether the current market practice of routing through 
wholesalers would persist. First, the Proposal would likely cause wholesalers and some retail 
brokers to incur significant adjustment costs to their operations, as well as a possible decline in 
profitability. The Proposal could also result in costs to individual investors, such as some retail 
brokers potentially resuming charging commissions for NMS stock trades, although the 
likelihood of this may be low.
352
 There may also be an increase in trading costs for retail broker 
customers that carry greater adverse selection risks and individual investors whose orders would 
not meet the definition of a segmented order because they averaged 40 or more daily trades in 
NMS stocks over the six preceding calendar months.
353
 Retail brokers could also experience 
costs from wholesalers reducing the amount of PFOF they pay to retail brokers or from reducing 
                                                
351
  See discussion in supra section III.A. 
352
  See discussion of potential changes in retail broker commissions in infra section VII.C.2.b.ii.  
353
  See supra note 186 and corresponding text discussing the definition of “segmented order.” 

184 
 
or charging for the order handling services they offer to retail brokers, which could ultimately be 
passed on to individual investors. 
Open competition trading centers would also face costs associated with creating qualified 
auctions, as would broker-dealers and trading centers that would incur costs related to 
establishing policies and procedures for identifying and handling segmented orders and 
identifying the originating retail brokers that submit segmented orders.
354
 There would also be 
compliance costs faced by the respective NMS plans and FINRA to update the consolidated 
market data feed and ADF to broadcast qualified auction messages. There may also be a decrease 
in displayed liquidity if qualified auctions attract liquidity away from exchange Limit Order 
Books (“LOBs”). However, because the majority of individual investor orders are already 
segmented from exchange LOBs, there is the potential that the effect of qualified auctions on 
LOB liquidity may not be significant.
355
  
The Commission recognizes that there would likely be significant competitive effects 
associated with the introduction of qualified auctions as mandated by Proposed Rule 615. 
Qualified auctions could reduce wholesaler market share for the execution of the orders of 
individual investors, which could result in the transfer of revenue and profit from wholesalers to 
other market participants that end up supplying more liquidity to the marketable orders of 
individual investors. Proposed Rule 615 could also affect competition in the market for trading 
services by enhancing the competitive position of exchanges and ATSs that operate qualified 
auctions relative to wholesalers as well as exchanges and ATSs that do not meet the criteria to 
                                                
354
  If NMS Stock ATSs opted to operate qualified auctions, they may also incur costs to update their business 
models and systems in order to meet the requirements to be an open competition trading center. See infra 
section VII.C.2.e. 
355
  See discussion on the effects of the Proposal on exchange LOB liquidity in infra section VII.C.2.g. 

185 
 
operate qualified auctions. The introduction of qualified auctions would likely lead to a reduction 
of PFOF in equity markets, which in turn may weaken the competitive position of retail brokers 
that are dependent on PFOF revenue but strengthen the competitive position of retail brokers that 
are not. In addition, Proposed Rule 615 could also increase competition for market access among 
routing broker-dealers if the competitive position of wholesalers declines, and retail brokers that 
had previously relied on wholesalers for routing services, choose to route their own orders to 
qualified auctions. 
The Commission has considered the economic effects of the Proposal and wherever 
possible, the Commission has quantified the likely economic effects of the Proposal. The 
Commission is providing both a qualitative assessment and quantified estimates of the potential 
economic effects of the Proposal where feasible. The Commission has incorporated data and 
other information to assist it in the analysis of the economic effects of the Proposal. 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, quantification is not practicable due to the number and 
type of assumptions necessary to quantify certain economic effects, which render any such 
quantification unreliable. The Commission’s inability to quantify certain costs, benefits, and 
effects does not imply that the Commission believes such costs, benefits, or effects are less 
significant. The Commission requests that commenters provide relevant data and information to 
assist the Commission in quantifying the economic consequences of the Proposal.  

186 
 
B. Baseline 
The baseline against which the costs, benefits, and the effects on efficiency, competition, 
and capital formation of the Proposal are measured consists of the existing routing practices and 
execution quality for the marketable orders of individual investors, the current state of 
interactions between institutional investors and the orders of individual investors, and the current 
business practices of retail brokers. These aspects of the baseline are framed by the statutory and 
regulatory baseline described above.
356
 
Retail brokers route most of their customers’ marketable order flow to wholesalers.
357
 
Wholesalers do not typically directly charge retail brokers for their order routing and execution 
services. In fact, they may pay some retail brokers for the opportunity to handle their order flow 
with PFOF. Typically, wholesalers’ vertical integration of routing and execution services for the 
orders of individual investors provides them flexibility with regard to their handling of order 
flow. They utilize sophisticated algorithmic trading technology to deliver their services.
358
 In 
                                                
356
  The regulatory baseline includes the changes to the current arrangements for consolidated market data in 
the MDI Rules; but those amendments have not been implemented, so they likely have not affected market 
practice. See supra section III.B.1 and infra section VII.B.7. Where implementation of the changes may 
affect certain numbers in the baseline, the description of the baseline below notes those effects.  
357
  Commission analysis of broker-dealer Rule 606 report order routing data in infra Table 3 indicates that 
retail brokers route over 90% of their marketable orders to wholesalers.  
358
 Wholesalers, similar to OTC market makers and exchange liquidity suppliers must establish connections 
with the numerous venues in which they wish to operate and provide liquidity. They also typically design 
smart order routers that can locate and provide liquidity in real time, as well as maintain fast data 
processing capabilities that enable them to respond to market conditions while abiding by the relevant trade 
execution regulations. Wholesalers also face the costs associated with price risk. As wholesalers trade 
against market participants, they takes positions at the opposite side, accumulating inventory. Holding 
inventory exposes wholesaler profits to inventory (price) risk, where the value of inventory, and hence, that 
of the wholesaler’s holdings may fluctuate as security prices vary. Scaling up the size of the business to 
ensure steady incoming flow from opposite sides of the markets is a common strategy pursued by 
wholesalers. This strategy enables them to execute buy and sell transactions, offsetting order flow from 
opposite sides, reducing the possibility of accumulating prolonged unwanted inventory. However, among 
other costs, scaling up requires more comprehensive, efficient connectivity networks and adds to the costs 
of establishing and maintaining such networks. 

187 
 
particular, wholesalers determine which orders to internalize (i.e., execute in a principal 
capacity) and which to execute in a riskless principal or agency capacity.
359
 Commission analysis 
indicates that wholesalers internalize over 90% of the dollar volume from individual investor 
marketable orders that are routed to them and executed.
360
 
The wholesaler business model relies in part on the ability to segment the order flow of 
individual investors, which typically have lower adverse selection risk than the orders of other 
types of market participants.
361
 Wholesalers are market makers that can identify orders with low 
adverse selection risk.
362
 Through segmentation, wholesalers typically internalize marketable 
orders with lower adverse selection risk and generally execute them at prices better than the 
current NBBO, i.e., because of segmentation, wholesalers are typically able to execute the 
marketable orders of individual investors at better prices than these orders would receive if they 
were routed to an exchange. An analysis of marketable NMS stock orders presented in Table 10 
below indicates that the orders that wholesalers internalize present lower adverse selection risk 
and receive higher execution quality relative to marketable orders wholesalers receive and 
execute in a riskless principal or agency capacity.
363
 Furthermore, results from Table 13 below 
                                                
359
  See discussion in infra section VII.B.5.a. 
360
  See analysis in infra Table 10.  
361
  Wholesalers and other liquidity providers (including other market-makers) face adverse selection risk when 
they accumulate inventory, for example by providing liquidity to more informed traders, because of the risk 
of market prices moving away from wholesalers and other market makers before they are able to unwind 
their positions. Wholesalers and other market makers are usually not privy to the motives or information of 
the investors with whom they are trading. As such, should the liquidity provider trade with an investor 
possessing short-lived price information about the security price, it is exposing its inventory to adverse 
selection risk. Hence, liquidity providers, including wholesalers and other market-makers normally choose 
their trading strategies to minimize their interaction with order flow with increased adverse selection risk. 
Wholesalers do this by attracting marketable orders of individual investors, known to be the order flow 
with the lowest adverse selection risk..  
362
  See infra note 405 and corresponding discussion. Adverse selection risk is based on various characteristics 
of the order, including the identity of the originating broker. 
363
  See analysis in infra Table 10. 

188 
 
show that wholesalers internalize a lower share of orders from retail brokers with the highest 
adverse selection risk. Additional results
364
 show that, relative to orders executed on exchanges, 
orders internalized by wholesalers are associated with lower price impacts (i.e., lower adverse 
selection risk),
365
 lower effective half-spreads (i.e., higher price improvement),
366
 and higher 
realized half-spreads (i.e., higher potential profitability).
367
 
Though wholesaler internalization generates price improvement for individual investors 
relative to the NBBO, the Commission posits that the potential isolation of marketable order 
flow routed to wholesalers results in suboptimal price improvement for individual investor orders 
                                                
364
  See infra Table 6 and infra Table 7 and corresponding discussion in section VII.B.4 for a comparison of 
exchange and wholesaler execution quality. 
365
  See supra notes 47-48 and accompanying text for a definition and discussion of price impact as a measure 
of adverse selection risk. By measuring the difference between the NBBO midpoint at the time of execution 
and the NBBO midpoint some fixed period of time after the transaction (e.g., one minute), price impact 
measures the extent of adverse selection costs faced by a liquidity provider. For example, if a liquidity 
provider provides liquidity by buying shares from a trader who wants to sell, thereby accumulating a 
positive inventory position, and then wants to unwind this inventory position by selling shares in the 
market, it will incur a loss if the price has fallen in the meantime. In this case, the price impact measure will 
be positive, reflecting the liquidity provider’s exposure to adverse selection costs. 
366
  See also results in Thomas Ernst & Chester Spatt, Payment for Order Flow and Asset Choice (last revised 
Mar. 13, 2022) (unpublished manuscript), available at https://ssrn.com/abstract=4056512 (retrieved from 
SSRN Elsevier database) (hereinafter “Ernst and Spatt Working Paper”). See supra note 46 and 
accompanying text for a definition and discussion of effective half-spreads. The effective half-spread is 
calculated by comparing the trade execution price to an estimate of the stock’s value (i.e., the midpoint of 
the prevailing NBBO at the time of order receipt) and thus captures how much more than the stock’s 
estimated value a trader has to pay for the immediate execution of their order. The effective spread will be 
smaller (or less positive) when the execution price is closer to the NBBO midpoint, reflecting price 
improvement received on that order. See, e.g., Bjorn Hagströmer, Bias in the Effective Bid-Ask Spread, 
142 J. Fin. Econ. 314 (2021). For the remainder of this analysis, we will use the term “effective spread” to 
refer to the “effective half-spread” as defined in supra section II.D.1. 
367
  See supra notes 49-50 and accompanying text for a definition and discussion of realized half-spreads. See, 
e.g., Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75423-75424 (Dec. 1, 2000) 
(Disclosure of Order Execution and Routing Practices) (“The smaller the average realized spread, the more 
market prices have moved adversely to the market center's liquidity providers after the order was executed, 
which shrinks the spread ‘realized’ by the liquidity providers. In other words, a low average realized spread 
indicates that the market center was providing liquidity even though prices were moving against it for 
reasons such as news or market volatility.”); see also Larry Harris, Trading and Exchanges: Market 
Microstructure for Practitioners (2003) at 286. See infra note 420 discussing the limitations of realized 
spreads for estimating the profits earned by market makers. For the remainder of this analysis, we will use 
the term “realized spread” to refer to the “realized half-spread” as defined in supra section II.D.1.  

189 
 
relative to what the Commission estimates would be achieved under the Proposal. Specifically, 
due to the isolation of this order flow by wholesalers from order-by-order competition, the 
amount of price improvement individual investors receive does not fully compensate for the 
lower adverse selection risk of their orders. Commission analyses presented below provide 
results that support this point.
368
 
The baseline section below is organized as follows. The baseline first discusses relevant 
features of trading services, including segmentation and interactions between institutional and 
retail order flows. Next, the baseline presents the Commission’s empirical findings on execution 
quality. The section ends with a discussion of retail broker services and rules addressing 
consolidated market data. 
 
Investors trade for a variety of reasons, whether because of informational advantages or 
because of hedging and liquidity needs. In an idealized competitive market, these investors 
would meet and trade amongst themselves, without the need of an intermediary. In such cases, 
trades would occur at the midpoint and neither side would pay the spread. In real-life markets, 
not all investors meet at the same time. Furthermore, investors may avoid trading with one 
another if they believe their counterparty has information that they do not, as opposed to trading 
for liquidity reasons. Moreover, investors often utilize the technology and services of a broker-
dealer in order to find and interact efficiently with the trading interest of other investors. For 
these reasons, there are broker-dealers who incur fixed costs for routing orders and charge a 
                                                
368
  See infra sections VII.B.4 and VII.B.5. 

190 
 
spread for acting as a dealer and supplying liquidity when end investors are not available to 
directly trade with each other. 
Market centers compete to attract order flow from these broker-dealers. As shown in 
Table 1, in Q1 of 2022, NMS stocks were traded on 16 registered securities exchanges,
369
 and 
off-exchange at 32 NMS Stock ATSs and at over 230 other FINRA members, including OTC 
market makers.
370 
OTC market makers include the 6 wholesalers that internalize the majority of 
individual investor marketable orders.
371
 These numerous market centers match traders with 
                                                
369
  Most of these 16 registered securities exchanges are owned by three exchange groups. Currently, the CBOE 
exchange group owns: Cboe BYX Exchange, Inc. (“Cboe BYX”), Cboe BZX Exchange, Inc. (“Cboe 
BZX”), Cboe EDGA Exchange, Inc. (“Cboe EDGA”), and Cboe EDGX Exchange, Inc. (“Cboe EDGX”); 
the Nasdaq exchange group owns: Nasdaq BX, Inc. (“Nasdaq BX”), Nasdaq PHLX LLC (“Nasdaq Phlx”), 
and The Nasdaq Stock Market LLC (“Nasdaq”); and the NYSE exchange group owns: NYSE, NYSE 
American LLC (“NYSE American”), NYSE Arca, Inc. (“NYSE Arca”), NYSE Chicago, Inc. (“NYSE 
CHX”), and NYSE National, Inc. (“NYSE National”). Other registered securities exchanges that trade 
NMS stocks and do not belong to one of these exchange groups include: Investors Exchange LLC (“IEX”), 
Long-Term Stock Exchange, Inc. (“LTSE”), MEMX LLC (“MEMX”), and MIAX Pearl, LLC (“MIAX 
PEARL”).The Commission approved rules proposed by BOX Exchange LLC (“BOX”) for the listing and 
trading of certain equity securities that would be NMS stocks on a facility of BOX known as BSTX LLC 
(“BSTX”), but BSTX is not yet operational. See Securities Exchange Act Release Nos. 94092 (Jan. 27, 
2022), 87 FR 5881 (Feb. 2, 2022) (SR-BOX-2021-06) (approving the trading of equity securities on the 
exchange through a facility of the exchange known as BSTX); 94278 (Feb. 17, 2022), 87 FR 10401 (Feb. 
24, 2022) (SR-BOX-2021-14) (approving the establishment of BSTX as a facility of BOX). BSTX cannot 
commence operations as a facility of BOX until, among other things, the BSTX Third Amended and 
Restated Limited Liability Company Agreement approved by the Commission as rules of BOX is adopted. 
Id. at 10407. 
370
  See supra section II.B for further details on the types of trading centers that execute trades in NMS stocks. 
See also Form ATS-N Filings and Information (for a list of ATSs that trade NMS stocks and have a Form 
ATS-N filed with the Commission), available at https://www.sec.gov/divisions/marketreg/form-ats-n-
filings.htm. Some academic studies attribute the fragmented nature of the market for NMS stocks, in part, 
to certain provisions of Regulation NMS. See, e.g., Maureen O’Hara & Mao Ye, Is Market Fragmentation 
Harming Market Quality?, 100 J. Fin. 459 (2011); Amy Kwan, Ronald Masulis & Thomas H. McInish, 
Trading Rules, Competition for Order Flow and Market Fragmentation, 115 J. Fin. 330 (2015). 
371
  The six OTC market makers that are classified as wholesalers for purposes of this release are the OTC 
market makers to which the majority of marketable orders originating from retail brokers were routed as 
identified from information from retail broker Rule 606(a)(1) reports from Q1 2022. These market makers 
also reported executing a significant percentage of shares routed to them on their Rule 605 reports. Rule 
606(a)(1) requires broker-dealers to produce quarterly public reports containing information about the 
venues to which the broker-dealer regularly routed non-directed orders for execution, including any 
payment relationship between the broker-dealer and the venue, such as any PFOF arrangements. See 17 
CFR 242.606(a)(1). 

191 
 
counterparties, provide a framework for price negotiation and/or provide liquidity to those 
seeking to trade. 
Table 1: NMS Stock Traded Share Volume Percentage of all NMS Stocks by Market Center Type 
Market Center Type 
Venue Cnt Share Volume Pct 
Off-Exchange Share 
Volume Pct 
Exchanges 
16 59.7%  
NMS Stock ATSs 
32 10.2% 25.2% 
Wholesalers 
a 
6 23.9% 59.4% 
Other FINRA Members 
232 6.3% 15.6% 
This table reports the percentage of all NMS stock executed share volume and the percentage of NMS stock share 
volume executed off-exchange for different types of market centers for Q1 2022. Venue Cnt lists the number of 
venues in each market center category. Share Volume Pct is the percentage of all NMS stock share volume (on 
plus off-exchange) executed by the type of market center. Off-Exchange Share Volume Pct is the percentage of 
off-exchange share volume executed by the type of market center. Exchange share volume and total market 
volume are based on CBOE Market Volume Data on monthly share volume executed on each exchange and share 
volume reported in FINRA Trade Reporting Facilities (TRFs).
b
 NMS Stock ATS, wholesaler and FINRA 
member share volume are based on monthly FINRA OTC Transparency data on aggregated NMS stock trading 
volume executed on individual ATSs and over-the-counter at Non-ATS FINRA members.
c
 Off-Exchange Share 
Volume Pct is calculated by dividing the NMS Stock ATS, wholesaler and FINRA member share volume from 
the FINRA Transparency Data by the total TRF share volume reported in CBOE Market Volume Data. 
a
 See supra note 371 for details regarding how FINRA member OTC market makers are classified as wholesalers 
for purposes of this release. 
b
 Cboe, U.S. Historical Market Volume Data, available at 
https://cboe.com/us/equities/market_statistics/historical_market_volume/. Trade Reporting Facilities (TRFs) are 
facilities through which FINRA members report off-exchange transactions in NMS stocks, as defined in SEC 
Rule 600(b)(47) of Regulation NMS. See https://www.finra.org/filing-reporting/trade-reporting-facility-trf. 
c
 FINRA OTC (Non-ATS) Transparency Data Monthly Statistics, available at 
https://otctransparency.finra.org/otctransparency/OtcData; FINRA ATS Transparency Data Monthly Statistics, 
available at https://otctransparency.finra.org/otctransparency/AtsBlocksDownload. The FINRA OTC (Non-ATS) 
Transparency Data may not contain all share volume transacted by a wholesaler or FINRA member because 
FINRA aggregates security-specific information for firms with “de minimis” volume outside of an ATS and 
publishes it on a non-attributed basis. 
Market centers’ primary customers are broker-dealers that route their own orders or their 
customers' orders for execution. Market centers may compete with each other for these broker-
dealers’ order flow on a number of dimensions, including execution quality. They also may 
innovate to differentiate themselves from other trading centers to attract more order flow. While 
registered exchanges cater to a broader spectrum of investors, ATSs and OTC market makers, 
including wholesalers, tend to focus more on providing trading services to either institutional or 
individual investor orders. 

192 
 
Table 1 displays NMS stock share volume percentage by market center type for Q1 2022. 
Exchanges execute approximately 60% of total share volume in NMS stocks, while off-exchange 
market centers execute approximately 40%. The majority of off-exchange share volume is 
executed by wholesalers, who execute almost one quarter of total share volume (23.9%)
372
 and 
about 60% of off-exchange share volume.
373
 NMS Stock ATSs execute approximately 10% of 
total NMS stock share volume and 25% of off-exchange share volume. Other FINRA members, 
besides wholesalers and ATSs, execute approximately 15% of off-exchange share volume. 
There is evidence that the percentage of trading volume executed off-exchange has been 
increasing over time. One industry group study found that volume traded off-exchange as a 
percent of total volume has increased since 2018, when off-exchange trading was 36.8% of total 
volume.
374
 According to another study by an exchange, an increase in orders executed by off-
exchange venues other than ATSs has been the driving factor behind this increase in off-
exchange trading, which has been particularly significant for lower-priced stocks.
375
 At the same 
                                                
372
  Of the six wholesalers identified in Q1 2022, two accounted for approximately 66% of wholesalers’ total 
executed share volume of NMS stocks. One study finds that the concentration of wholesaler internalization, 
as measured by the Herfindahl-Hirschman Index (HHI) of share volume executed across wholesalers, has 
increased from 2018 to 2021. See Edwin Hu & Dermot Murphy, Competition for Retail Order Flow and 
Market Quality (last revised Oct. 7, 2022) (unpublished manuscript), available at 
https://ssrn.com/abstract=4070056 (retrieved from Elsevier database). 
373
  The share volume reported for wholesalers in FINRA OTC Transparency Data includes both individual 
investor orders executed by wholesalers in a principal capacity as well as other orders executed by 
wholesalers in a principal capacity, such as institutional orders executed on their SDPs. It does not include 
share volume that they executed in a riskless principal capacity or share volume that was routed and 
executed at another market center. 
374
  See SIFMA Insights, Analyzing the Meaning Behind the Level of Off-Exchange Trading (Sept. 2021), 
available at https://www.sifma.org/wp-content/uploads/2021/09/SIFMA-Insights-Analyzing-Off-
Exchange-Trading-09-2021.pdf. The study found off-exchange trading to be 44.2% of total YTD trading 
volume as of Sept. 2021. 
375
  See NYSE Data Insights, Market Volume and Off-Exchange Trading: More than a Retail Story (June 15, 
2020), available at https://www.nyse.com/data-insights/market-volume-and-off-exchange-trading. In 
particular, the study found that, for stocks priced lower than $5, off-exchange trading market share 
increased from 45.4% in Oct. 2019 to 54.8% in June 2020, and that ATS market share decreased from 

193 
 
time, some have highlighted a decline in liquidity displayed at or near the NBBO on 
exchanges.
376
 Industry participants have raised concerns regarding a “monopolistic 
environment,” in which information off-exchange becomes sufficiently concentrated and 
determinative as to widen spreads on exchange.
377
 For example, a liquidity provider deciding 
whether to rest an order on the book would face the possibility of a wholesaler or other off-
exchange market maker gleaning information from the posted liquidity to determine a price to 
execute off-exchange that accounts for the lack of adverse selection risk in off-exchange flow.
378
 
This limits the execution possibilities on exchange. On the other hand, any posted liquidity 
(which grants an option to liquidity demanders or to those engaged in latency arbitrage) is 
vulnerable to being "picked off"—namely executed against exactly when the price is (in the case 
of a resting buy order) moving lower or (in the case of a sell order) moving higher. These 
dynamics lower the incentives to post liquidity on exchange. 
Exchanges (via their rules) and ATSs determine how orders compete with each other, 
wherein liquidity suppliers set prices and wait for execution at their prices by liquidity 
demanders. This interaction between liquidity providers and demanders encompasses order-by-
                                                
14.2% to 11.5% of consolidated average daily volume and non-ATS OTC market share increased from 
20.5% to 27.8% over the same time period.  
376
  See, e.g., Gunjan Banerji, Buying or Selling Stocks? It Isn’t Always Easy, Wall St., J., Jan. 2, 2020, 
showing a greater than 90% reduction in the number of shares available at the best prices in the SPDR S&P 
500 ETF from 2007 to 2018, as one example of the overall reduction in market liquidity. Furthermore, in a 
comment letter to the Commission responding to comments on an SRO proposed rule change, an exchange 
found that the COVID crisis lead to a further substantial decrease in the depth of liquidity at the NBBO, as 
the average displayed quote size declined by 69% from Jan. to Mar. 2020 for S&P 500 stocks. See Letter 
from John Ramsay, Chief Market Policy Officer, Investors Exchange LLC to Ms. Vanessa Countryman, 
Secretary, U.S. Securities and Exchange Commission, dated May 10, 2020 (File No. SR-IEX-2019-15), 
available at https://www.sec.gov/comments/sr-iex-2019-15/sriex201915-7169827-216633.pdf.  
377
        See Hitesh Mittal & Kathryn Berkow, The Good, The Bad & The Ugly of Payment for Order Flow (May 3, 
2021), available at https://bestexresearch.com/the-good-the-bad-the-ugly-of-payment-for-order-flow/. 
378
        Mitigating this information asymmetry is that off-exchange trades also print to a consolidated post-trade 
tape, though with latency compared with on-exchange trades. 

194 
 
order competition. Unlike exchanges, for which each exchange’s rules determine competition in 
a non-discretionary fashion, wholesalers execute or route orders in a discretionary fashion.
379
 
While some orders may be routed to a central limit order book against which institutional 
investors may execute (on the discretion of the wholesaler), institutional investors generally 
consider order flow routed to a wholesaler to be “inaccessible.”
380
 
As a proxy for expected execution quality, quoted prices are a dimension on which 
exchanges compete to attract order flow. Specifically, exchanges are required to post the best bid 
and ask prices available on the exchange at that time
381
, and broker-dealers can observe those 
prices and choose to route orders to the exchange posting the best prices at a given point in time. 
However, others who provide trading services, such as ATSs and OTC market makers, do not 
usually compete on this dimension.
382
 In other words, wholesalers generally do not compete for 
order flow by posting competitive prices the way exchanges do. They do not display or otherwise 
advertise the prices at which they are willing to internalize individual investor orders at a given 
point in time. This suggests that wholesalers attract order flow by offering retail brokers more 
                                                
379
  A study estimates that the volume of individual investor orders executed by wholesalers accounted for 
approximately 16% to 17% of consolidated share volume during Q1 2022. See Rosenblatt Securities, An 
Update on Retail Market Share in US Equities (June 24, 2022), available at https://www.rblt.com/market-
reports/trading-talk-an-update-on-retail-market-share-in-us-equities. However, wholesalers are not 
completely focused on individual investor order flow and some do offer services to institutional order flow. 
See infra section VII.B.3 for a discussion of their interaction with institutional order flow. 
380
 See supra note 37 (citing Jennifer Hadiaris, Cowen Market Structure: Retail Trading — What’s going on, 
what may change, and what can you do about it?, Cowen (Mar. 23, 2021), available at 
https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-what-can-
institutional-traders-do-about-it/). Further, wholesalers are also not subject to a statutory or regulatory 
requirement to provide fair access. See supra section III.B.3 for further discussion of requirements that do 
and do not apply to wholesalers. 
381
  See Rule 602 of Regulation NMS. 
382
  ATSs typically compete for institutional order flow by offering innovative trading features such as distinct 
trading protocols and segmentation options. They may also compete on fees. In addition, they could include 
their ATS access in the broader set of bundled services that the broker-dealer director of the ATS offers to 
their institutional investors. 

195 
 
than just competitive prices at a point in time on a specific order. Instead, wholesalers generally 
attract order flow by offering to on average execute orders at prices that are better than displayed 
prices. Additionally, wholesalers bundle their market access services with execution services, 
thereby vertically fully integrating order handling and execution services for their retail broker 
customers. 
 
Individual investor orders typically carry lower adverse selection risk, in part because 
individual investors may have less information on market conditions than other market 
participants and in part because their orders tend to be small. Both of these factors make 
individual investor orders less likely to be followed by orders in the same direction.
383
 The lower 
adverse selection risk of individual investor orders makes them more valuable for segmentation 
by liquidity providers that want to execute these orders in a principal capacity, since they are less 
costly to liquidity providers such as wholesalers to execute (i.e., have lower price impacts) than 
orders with higher adverse selection risk. Due to this lower cost, wholesalers are able to provide 
price improvement to these orders and still earn higher profits, as discussed in supra section 
II.D.2. 
Regulation NMS allows an order to be executed off-exchange, provided that an off-
exchange trading venue executes the order at a price equal to the NBBO or better.
384
 To the 
extent that a liquidity provider is able to segment
385
 low-risk individual investor order flow, this 
                                                
383
  While this characterization of individual orders is generally true, there are also individual investors that are 
highly sophisticated and informed of market conditions. See infra section VII.B.5.b for an empirical 
analysis and discussion of variation in execution quality based on variation in adverse selection risk of 
retail broker order flow. 
384
  See supra section III.B.2.b. 
385
  See supra section I for a definition of segmentation. 

196 
 
order flow can be executed against with higher profitability for the liquidity provider. Since 
exchanges are limited in their ability to segment order flow (with the exception of retail liquidity 
programs),
386
 the ability of off-exchange venues to segment orders is one reason why orders are 
routed off-exchange. Furthermore, off-exchange trading venues are often more flexible in 
determining prices than national securities exchanges.
387
 
The ability to segment is one reason why many individual investor orders are executed 
off-exchange. Another reason is potential efficiency in outsourcing routing services. Maintaining 
market access at many venues is costly, so broker-dealers have an incentive to use the services of 
other broker-dealers who maintain market access at most, if not all, market centers. Wholesalers 
are the dominant providers of market access for retail brokers and bundle their market access 
services with execution services. Yet another reason arises from economies of scale stemming 
from the information that can be gleaned from large quantities of individual orders.
388
 Because of 
the profitability in these segmented orders, wholesalers will sometimes pay for them, a practice 
known as payment for order flow. For some retail brokers, this may create an additional 
incentive for routing to the wholesalers. 
 
Most individual investor orders are non-directed, so individual investor order routing 
choices are largely made by retail brokers. Specifically, retail brokers choose how to access the 
market in order to fill their individual investor customers’ orders. Many broker-dealers that 
                                                
386
  See infra section VII.B.2.c. 
387
  For example, Rule 612 does not prevent wholesalers, after they receive an order from a broker, from 
choosing to execute that order in a transaction at a sub-penny price. See supra note 148 and corresponding 
discussion. 
388
  See infra note 406 for a discussion of the informational advantages that routing can provide to wholesalers. 

197 
 
handle customer accounts, including many retail brokers, do not directly access national 
securities exchanges or ATSs for their orders, relying on other broker-dealers to facilitate market 
access for them.
389
 For example, only members of exchanges or subscribers to (or owners of) 
ATSs can directly access those particular market centers.
390
 As a result, some broker-dealers that 
are exchange members or ATS subscribers/owners provide access to other brokers-dealers by 
rerouting their customer orders to these market centers. The broker-dealers (including 
wholesalers) who provide market access can choose to compete on a number of dimensions, such 
as by charging lower fees or paying for order flow, by facilitating better execution quality, and 
by providing other valued services.
391
 
Retail brokers may route to wholesalers because the cost of sending orders to wholesalers 
is lower than the various alternatives available to their customers for market access. While some 
broker-dealers have SORs,
392
 exchange memberships, and ATS subscriptions, and are thus able 
to provide market access to retail brokers, these other broker-dealers incur costs in handling 
order flow for retail brokers in the form of exchange access fees, ATS access fees, and 
administrative and regulatory costs such as recordkeeping and the risk management controls of 
Rule 15c3-5. While wholesalers could incur some of these marginal costs as well, they benefit on 
the margin from individual investor order flow because they have the option to internalize the 
                                                
389
  Providing market access can mean rerouting customer orders and it can also involve sponsoring access for 
the broker to send customer orders directly to a market center.  
390
  The number of broker-dealers providing access is thus limited due to the expenses of being an exchange 
member and ATS subscriber. In addition, membership on an exchange also gives the broker-dealer access 
to exchange-provided order routers that re-route orders to other exchanges at a per-order fee. Thus, 
membership on one exchange can effectively provide access, though not directly, to all exchanges. 
391
  Although some retail brokers are members of exchanges, they may still prefer to rely on wholesalers’ 
expertise for the handling and routing of their customers’ orders. 
392
  Individual investors and professional traders relying on displayed screens to access financial markets 
generally do not have access to these low-latency (algorithmic, high speed) technologies. 

198 
 
most profitable of that order flow, i.e., the individual investor orders with the lowest adverse 
selection risk.
393
 This ability to capture, identify, and internalize profitable orders from 
individual investors allows wholesalers to provide market access to retail brokers at low explicit 
cost, either by providing PFOF or by not charging retail brokers explicitly for market access. 
This service of obtaining market access on behalf of retail brokers assists retail brokers by 
allowing them to avoid routing expenses (even in cases where the wholesaler further routes the 
order instead of internalizing) or costly liquidity searches, and may increase retail brokers’ 
reliance on wholesalers beyond any payment they receive for routing their order flow to 
wholesalers. 
Indeed, Table 2 shows that retail brokers who accept PFOF (“PFOF brokers”) pay less to 
route their orders to wholesalers than to route them elsewhere.
394
 In fact, they are paid to route 
their order flow to wholesalers for every order type reported in the table. On average, rates paid 
by wholesalers for both market and marketable limit orders are higher than those paid by 
alternative venues, with wholesalers paying an average of 13 cents per 100 shares for market 
orders and 12.6 cents for marketable limit orders across S&P 500 and non-S&P 500 stocks 
during Q1 2022. In contrast, exchanges, on average, charged PFOF brokers when they routed 
their marketable order flow to exchanges. This likely indicates that most of the volume that 
PFOF brokers sent to exchanges was routed to maker-taker exchanges (where fees are assessed 
on marketable orders).
395
 Furthermore, since retail brokers that do not accept PFOF (“non-PFOF 
                                                
393
  See infra section VII.B.2.b for further discussion of wholesaler internalization. 
394
  In Table 2, average payment rates reported in Rule 606 reports for PFOF brokers in S&P 500 stocks and 
non-S&P 500 stocks in Q1 2022 are broken down by trading venue and order type, with rates given in cents 
per 100 shares. 
395
  Furthermore, wholesaler rates for non-marketable orders are more than double the rates for marketable 
orders, averaging 27.1 cents per hundred shares compared to 13 cents for market orders and 12.6 cents for 
marketable limit orders. Additionally, Table 2 shows that the average payment rates PFOF brokers receive 

199 
 
brokers”) also incur fees when they route marketable orders to exchanges, they are also 
incentivized to route their marketable order flow to wholesalers, who do not charge them explicit 
costs to route and execute their orders.  
Table 2: Average Rule 606 Payment Rates for Q1 2022 to PFOF Brokers by Trading Venue Type 
  
Market 
Orders 
Marketable 
Limit Orders 
Non-
Marketable 
Limit Orders 
Other 
Orders 
S&P 500 
Exchange -5.9 -23.9 30.9 20.8 
OTC Market Maker- Wholesaler 15.2 21.8 41.1 24.1 
Other 4.5 -0.6 -0.6 7.5 
Non-S&P 500 
Exchange -14.9 -15.3 17.9 16.5 
OTC Market Maker - Wholesaler 12.5 11.8 24.6 10.1 
Other 1.5 -3.7 -4.6 1.5 
Combined 
Exchange -12.4 -15.7 19.3 17.1 
OTC Market Maker - Wholesaler 13.0 12.6 27.1 11.9 
Other 1.7 -3.7 -4.5 2.0 
This table shows the average payment rates (in cents per 100 shares) made from different types of trading venues in Q1 
2022 to 14 retail PFOF brokers from wholesalers based on their Rule 606 reports. The table breaks out average rates 
from exchanges, wholesalers, and other trading venues for market orders, marketable limit orders, non-marketable limit 
orders, and other orders in S&P 500 stocks and non-S&P 500 stocks. Other venues include any other venue to which a 
retail broker routes an order other than a wholesaler or an exchange. The 43 broker-dealers were identified from the 54 
retail brokers used in the CAT retail analysis (see infra note 466). This analysis uses the retail broker’s Rule 606 report if 
it publishes one or the Rule 606 report of its clearing broker if it did not publish a Rule 606 report itself (the sample of 43 
broker-dealer Rule 606 reports include some broker-dealers that were not included in the CAT analysis because some 
clearing broker Rule 606 reports are included). Some broker-dealers reported handling orders only on a not held basis 
and did not have any Rule 606. 
Table 3 reflects that wholesalers dominate the business of providing market access for 
retail brokers and indicates that PFOF is a factor in retail broker routing decisions.
396
 Data from 
                                                
from routing non-marketable limit orders to wholesalers is greater than the average rates they receive from 
routing them to exchanges. This may be driven by wholesalers passing through exchange rebates for these 
orders, for which they may receive higher volume-based tiering rates compared to retail brokers, back to 
broker-dealers. 
396
  Table 3 summarizes order routing decisions of 43 of the most active retail brokers about non-directed 
orders; see infra note 466. Routing choices are summarized separately for 14 PFOF brokers in equity 
markets and non-PFOF brokers. Note that some brokers do not accept PFOF for orders in equities but do 
accept PFOF for orders in options. Consistent with Rule 606, routing statistics are aggregated together in 
Rule 606 reports based on whether the stock is listed in the S&P500 index. Rule 606 reports collect routing 
and PFOF statistics based on four different order types for NMS stocks: (1) market orders, resulting in 
immediate execution at the best available price; (2) marketable limit orders, resulting in immediate 

200 
 
Table 3 indicates that orders of individual investors for NMS stocks are primarily routed to 
wholesalers, although a small fraction of individual investor orders are routed to exchanges and 
other broker-dealers providing market access or other market centers (i.e., ATSs), some of which 
may be affiliated with the broker that received the original order. 
                                                
execution at the best price that is not worse that the order’s quoted limit price; (3) non-marketable limit 
orders whose quoted limit price less aggressive than the NBBO, often preventing immediate execution; and 
(4) all other orders. See supra note 371 for a summary of the requirements of Rule 606(a)(1) of Regulation 
NMS 

201 
 
Table 3: Retail Broker Order Routing in NMS Stocks for Q1 2022, Combining PFOF and non-PFOF 
Brokers 
Panel A: Non S&P 500 Stocks 
Venue Type Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other Total 
Other 6.0% 4.7% 3.1% 1.5% 3.6% 
Exchange 0.2% 5.5% 22.5% 0.8% 8.5% 
Wholesaler 93.9% 89.8% 74.4% 97.6% 87.9% 
Total 26.5% 12.6% 33.6% 27.3% 100.0% 
Panel B: S&P 500 Stocks 
Venue Type Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other Total 
Other 6.6% 5.9% 1.8% 1.7% 3.6% 
Exchange 0.2% 4.6% 25.1% 0.8% 9.1% 
Wholesaler 93.3% 89.6% 73.1% 97.5% 87.3% 
Total 30.6% 9.6% 33.5% 26.4% 100.0% 
This table aggregates Rule 606 reports from retail brokers and shows the percentage of market orders, marketable 
limit orders, non-marketable limit orders, and other orders that retail brokers route to different types of venues in 
Q1 2022. Other venues include any other venue to which a retail broker routes an order other than a wholesaler or 
an exchange. Order type classifications are based on the order types broker-dealers are required to include in their 
Rule 606 reports.
 
 
Table 3 aggregates routing information from 43 broker-dealer Rule 606 reports from Q1 2022. The 43 broker-
dealers were identified from the 54 retail brokers used in the CAT retail analysis (see infra note 466). This 
analysis uses the retail broker’s Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if 
it did not publish a Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include some broker-
dealers that were not included in the CAT analysis because some clearing broker Rule 606 reports are included). 
Some broker-dealers reported handling orders only on a not held basis and did not have any Rule 606 reports. 
Because Rule 606 only include percentages of where their order flow is routed and not statistics on the number of 
orders, the reports are aggregated together using a weighting factor based on an estimate of the number of non-
directed orders each broker-dealer routes each month. The number of orders is estimated by dividing the number 
of non-directed market orders originating from a retail broker in a given month (based on estimates from CAT 
data) by the percentage of market orders as a percent of non-directed orders in the retail broker’s Rule 606 report 
(the weight for a clearing broker consists of the aggregated orders from the introducing brokers in the CAT retail 
analysis that utilize that clearing broker). 
 

202 
 
Table 4: Retail Broker Order Routing in NMS Stocks for March 2022 
Panel A: Non-S&P 500 Stocks 
Non-PFOF Brokers 
Venue Type Market 
Marketable 
Limit 
Non-marketable 
Limit 
Other Total 
Other 
24.1% 22.3% 4.2% 41.6% 16.0% 
Exchange 
<0.1% 25.3% 80.8% 19.7% 39.8% 
Wholesaler 
76.0% 52.4% 15.0% 38.8% 44.2% 
Total 
38.4% 12.4% 44.2% 5.0% 100.0% 
PFOF Brokers 
Venue Type Market 
Marketable 
Limit 
Non-marketable 
Limit 
Other Total 
Other <0.1% 1.2% 2.8% 0.3% 1.1% 
Exchange 0.2% 1.5% 5.8% 0.2% 2.1% 
Wholesaler 99.7% 97.3% 91.4% 99.5% 96.8% 
Total 24.1% 12.7% 31.5% 31.8% 100.0% 
Panel B: S&P 500 Stocks 
Non-PFOF Brokers 
Venue Type Market 
Marketable 
Limit 
Non-marketable 
Limit 
Other Total 
Other 24.8% 27.0% 3.2% 23.4% 15.4% 
Exchange <0.1% 19.6% 83.2% 8.2% 39.0% 
Wholesaler 75.2% 53.4% 13.6% 68.3% 45.6% 
Total 39.0% 9.2% 43.8% 8.0% 100.0% 
PFOF Brokers 
Venue Type Market 
Marketable 
Limit 
Non-marketable 
Limit 
Other Total 
Other <0.1% 0.5% 1.3% 0.3% 0.6% 
Exchange 0.2% 0.9% 3.4% 0.3% 1.3% 
Wholesaler 99.8% 98.6% 95.3% 99.5% 98.2% 
Total 28.4% 9.7% 30.7% 31.2% 100.0% 
 
This table aggregates Rule 606 reports from PFOF and non-PFOF retail brokers and separately shows the 
percentage of market orders, marketable limit orders, non-marketable limit orders, and other orders PFOF brokers 
and non-PFOF brokers route to different types of venues in Q1 2022. PFOF brokers are retail brokers that receive 
payments for routing marketable orders to wholesalers. Other venues include any other venue to which a retail 
broker routes an order other than a wholesaler or an exchange. Order type classifications are based on the order 
types broker-dealers are required to include in their Rule 606 reports. 

203 
 
Table 4 aggregates routing information from PFOF and non-PFOF broker-dealer Rule 606 reports from Q1 2022. 
Fourteen retail brokers are identified as PFOF brokers that receive payments for routing orders in NMS stocks to 
wholesalers. Non-PFOF brokers are identified as retail brokers that do not receive monetary compensation when 
they route orders in NMS stocks to wholesalers. The 43 broker-dealers were identified from the 54 retail brokers 
used in the CAT retail analysis (see infra note 466). This analysis uses the retail broker’s Rule 606 report if it 
publishes one or the Rule 606 report of its clearing broker if it did not publish a Rule 606 report itself (the sample 
of 43 broker-dealer Rule 606 reports include some broker-dealers that were not included in the CAT analysis 
because some clearing broker Rule 606 reports are included). Some broker-dealers reported handling orders only 
on a not held basis and did not have any Rule 606 reports. Because Rule 606 only include percentages of where 
their order flow is routed and not statistics on the number of orders, the reports are aggregated together using a 
weighting factor based on an estimate of the number of non-directed orders each broker-dealer routes each 
month. The number of orders is estimated by dividing the number of non-directed market orders originating from 
a retail broker in a given month (based on estimates from CAT data) by the percentage of market orders as a 
percent of non-directed orders in the retail broker’s Rule 606 report (the weight for a clearing broker consists of 
the aggregated orders from the introducing brokers in the CAT analysis that utilize that clearing broker). 
 
CAT data analysis indicates that about 80% of the share volume and about 74% of the 
dollar volume of individual investor marketable orders that were routed to wholesalers and 
executed comes from PFOF brokers.
397
 Data from Table 4 indicate that, while retail brokers who 
accept PFOF from wholesalers tend to send more of their orders to those wholesalers, 
wholesalers even dominate the market access services for non-PFOF brokers, though non-PFOF 
brokers route a significantly lower fraction (i.e., 75.2% to 76%) of their market orders to 
wholesalers, compared to 99.7% to 99.8% of market orders for PFOF brokers. Moreover, non-
PFOF brokers route 24.1% to 24.8% of their market orders to other non-exchange market 
centers, e.g., ATSs, while PFOF brokers route less than 1% of their market orders to these 
market centers. However, regardless of whether the retail broker accepts PFOF, the order type, or 
the S&P500 index inclusion of the stock,
398
 Table 3 shows that retail brokers route over 87% of 
their customer orders to wholesalers.  
This result suggests that, while PFOF is an important factor in retail brokers routing 
decisions, wholesalers likely also compare favorably to other market access centers (including 
                                                
397
  See infra Table 14. 
398
  Rule 606 reports require that broker-dealers separate their disclosure information for S&P 500 stocks, non-
S&P 500 stocks, and options. 

204 
 
retail brokers pursuing their own market access) along other dimensions. The routing behavior in 
Table 4 may, in part, reflect a tendency of non-PFOF brokers to route individual investor orders 
to market centers such as their own ATSs for mid-point execution and the lack of an affiliated 
ATS for PFOF brokers. However, even broker-dealers with their own ATSs do not route the 
majority of their individual investor order flow to those ATSs and typically do not internalize 
order flow. Further, retail brokers with membership on multiple exchanges primarily route their 
marketable orders to wholesalers. These results could point to a lower marginal cost of routing to 
wholesalers relative to other routing and execution alternatives. Table 5 below shows that 
wholesalers appear to compare favorably to exchanges in the execution quality of orders routed 
to them, suggesting that execution quality could be another key factor in the decision of retail 
brokers to route to wholesalers.
399
 In particular, marketable orders routed to wholesalers appear 
to have higher fill rates, lower effective spreads, and lower E/Q ratios.
400
 These orders are also 
more likely to receive price improvement and, conditional on receiving price improvement, 
receive greater price improvement when routed to wholesalers as compared to exchanges. 
In addition, wholesalers may provide additional valuable services to retail brokers that 
route order flow to them. Based on staff experience, the Commission understands that 
wholesalers are more responsive to retail brokers that provide them with order flow, including, 
for example, following customer instructions not to internalize particular orders. More broadly, 
wholesalers appear to provide retail brokers with a high degree of consistency with regard to 
execution quality. More specifically, while wholesalers receive order flow from retail brokers 
                                                
399
  See infra section VII.B.4 for a full discussion of Table 5 and section VII.B.5 for a discussion of how the 
Commission preliminarily believes that the execution quality of orders routed to wholesalers could be even 
better if most of such orders were not isolated from order-by-order competition. 
400
  The E/Q ratio is the ratio of a stock’s effective spread over quoted spread. A lower value indicates smaller 
effective spreads (i.e., trading costs) as a percentage of the quoted spread.  

205 
 
that contains variation in quoted spreads and adverse selection risk, wholesalers can target an 
average level of price improvement across this heterogeneous order flow, resulting in a relatively 
consistent degree of execution quality. 
 
Wholesalers provide market access for retail brokers and generally choose to internalize 
the order flow they receive from these brokers,
401
 thereby vertically integrating (i.e., bundling) 
their market access and execution services. This vertical integration helps wholesalers achieve a 
competitive advantage in both market access and execution services. Wholesalers are distinct 
from other broker-dealers that provide market access and execution services, in that they focus 
on marketable order flow from individual investors and internalize the large majority of orders 
routed to them. 
Wholesalers determine which orders to execute internally and which to reroute to other 
trading venues, often using a riskless principal transaction. For example, after receiving an order 
from a retail broker, a wholesaler may send a principal marketable order similar to the retail 
broker order to an exchange and, upon execution of the principal order at the exchange, provide 
the same execution terms to the original retail broker order. Alternatively, a wholesaler can 
achieve the same economic result by rerouting the original order in an agency capacity as well. 
In this way, the wholesaler is providing the market access service, but another market center is 
providing the execution service. 
Commission analysis shows that wholesalers internalize over 90% of the executed dollar 
value in NMS stocks from the marketable order flow routed to them by retail brokers, which 
                                                
401
  See analysis in infra Table 10. 

206 
 
amounts to more than 80% of share volume.
402
 Results also show that the marketable NMS stock 
orders wholesalers choose to internalize have less adverse selection risk: orders that wholesalers 
execute in a principal capacity have a price impact of 0.9 bps, compared to a price impact of 4.6 
bps for those executed via other methods.
403
 These results stem from the incentives wholesalers 
face. As dealers, wholesalers will wish to hold inventory that is not subject to short-term adverse 
price moves. Because orders with greater adverse selection risk will, on average, be followed by 
adverse price moves, wholesalers will on average internalize fewer of these orders.
404
 
Wholesalers employ algorithms to predict price impact using information to which only 
they have access, such as the identity of the retail broker, and information any market center 
would have, such as order characteristics and stock or market characteristics.
405
 Indeed, Table 12 
shows significant variation in average price impacts across retail brokers. Because wholesalers 
know which retail brokers sent them the order, they can use that information in combination with 
other information to make internalization and pricing decisions.
406
 The results in Table 13 
support this conclusion, indicating that wholesalers internalize a higher percentage of individual 
                                                
402
  See analysis in infra Table 10.  
403
  Id. See also supra note 365 for a definition and discussion of price impact as a measure of adverse selection 
risk. 
404
  See infra Table 10 in section VII.B.5.a for analysis indicating that individual investor orders wholesalers 
internalize have lower adverse selection risk and earn higher economic profits, as measured by price 
impacts and realized spreads, than orders wholesalers effectively reroute.  
405
 While these provide a few examples of information that could be used by wholesalers, the Commission 
lacks information on what information wholesalers actually use. Further, while the analysis presented here 
shows associations between characteristics, price impacts, and internalization, the analysis cannot 
determine that the expected price impact based on a particular characteristic caused the wholesaler to 
internalize the order.  
406
  Having aggregate information on retail order flow could help the wholesaler assess the direction of the 
market, which could also be beneficial for business lines beyond the firm’s wholesaler business. 

207 
 
investor orders from retail brokers whose customers’ orders on average exhibit lower price 
impact.  
 
Retail liquidity programs provide an on-exchange means of segmentation. Indeed, the 
RLPs offered by many registered exchanges are specifically set up to segment the marketable 
order flow of individual investors,
407
 allowing liquidity suppliers to interact with this order flow 
without the risk that their orders will trade against the marketable orders of other market 
participants that may impose greater adverse selection risk. The pricing increments, both for 
quoting and trading, in RLPs, are usually 0.1 cents,
408
 although some exchanges have RLP 
programs that allow liquidity suppliers to quote only at the midpoint.
409
 RLP programs typically 
do not charge an access fee to individual investor orders executed in RLP programs.
410
 Quotes in 
RLP programs are not displayed.
411
 Instead, the SIP disseminates a flag indicating the side of the 
market for which an exchange has an RLP quote available at a price better than the NBBO 
available. However, the SIP does not make known the price or the size of the RLP quote, which 
creates opacity in the liquidity available in RLP programs. The goal of these programs is to 
                                                
407
  See, e.g., NYSE Rule 7.44 (concerning RLPs). 
408
  See, e.g., description of NYSE Retail Liquidity program, available at 
https://www.nyse.com/publicdocs/nyse/markets/liquidity-programs/RLP_Fact_Sheet.pdf. 
409
  See, e.g., IEX retail liquidity program, available at https://exchange.iex.io/products/retail-program/.  
410
  See, e.g., NYSE Price List, available at 
https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf; NYSE Arca Trading 
Fee,available at https://www.nyse.com/publicdocs/nyse/markets/nyse-
arca/NYSE_Arca_Marketplace_Fees.pdf;  and IEX Exchange Fee Schedule, available at 
https://exchange.iex.io/resources/trading/fee-schedule/. 
411
  RLPs operate under an exemption from Rule 612, and are therefore allowed to use sub-penny pricing. As 
part of this exemption, however, they are only eligible for individual investors to execute against and 
cannot display quotes. See supra note 152 for further discussion.  

208 
 
compete with wholesalers and to attract marketable order flow of individual investors to trade on 
national securities exchanges.
412
  
However, it is the Commission’s understanding that the share of individual investor 
trading volume executed through RLPs is small. For example, in 2021, less than 0.2% of 
consolidated volume executed in exchange RLP programs.
413
 This low market share could be the 
result of several factors. For example, many retail brokers lack direct access to exchanges 
offering RLPs and the means of indirect access may be too costly for RLPs compared to routing 
to wholesalers. Further, wholesalers who compete with RLPs lack the incentives to route the 
individual investor order flow with lower adverse selection risk to the RLPs. If only the 
individual investor order flow with higher adverse selection risk goes to RLPs, the liquidity 
providers in RLPs would widen spreads to reflect the increased adverse selection.
414
 This in turn, 
makes RLPs less competitive relative to wholesalers. Thus, even retail brokers with exchange 
membership may find wholesalers more attractive than RLPs for cost or execution quality 
reasons. 
                                                
412
  See supra note 151 regarding the purpose and operation of RLPs. 
413
  See Rosenblatt Securities, How Can the Buy Side Interact With Retail Flow? (Feb. 14, 2022) available at 
https://www.rblt.com/market-reports/how-can-the-buy-side-interact-with-retail-flow. 
414
  Unlike wholesalers, liquidity suppliers in RLP programs are not aware of the identity of the retail broker 
that the individual investor originated from. Therefore, they are not able to offer tighter spreads to 
individual investor orders from retail brokers whose orders on average have lower adverse selection risk. 
Instead, liquidity suppliers in RLP need to price their quotes based on the average expected adverse 
selection risk of all orders routed to the RLP. See, e.g., Lawrence R. Glosten & Paul R. Milgrom, Bid, Ask, 
and Transaction Prices in a Specialist Market With Heterogeneously Informed Traders, 14 J. Fin. Econ. 71 
(1985). 

209 
 
 
Several wholesalers operate SDPs through which they execute institutional orders in 
NMS stocks against their own inventory.
415
 Because wholesalers also execute individual investor 
orders against their own inventory, the use of SDPs amounts to an indirect interaction between 
institutional and individual investor orders. The trading volume on SDPs is economically 
significant. For example, a study found that in Q1 2022, the SDPs affiliated with the two highest-
volume wholesalers accounted for around 3% of consolidated average daily trading volume in 
NMS stocks.
416
 Institutional clients often communicate their trading interest to SDPs using 
Immediate or Cancel Orders (“IOCs”) or respond to Indication of Interest (“IOIs”) issued by the 
SDP.  
On an SDP, the single dealer, i.e., the wholesaler, is privy to the identities of the 
counterparties, i.e., institutional investors. One academic paper has found that this information 
revelation may have adverse execution consequences for the institutional investor.
417
 On the 
other hand, there also may be benefits relative to other trading venues. The trading interest of 
investors who submit IOCs to an SDP for liquidity are only exposed to the single dealer 
operating a platform. In contrast, submission of the same order to an exchange or an ATS may 
alert many other market participants to the underlying trade interest, triggering reactions. As 
such, institutional investors may view SDPs as an opportunity to tap into a pool of liquidity that 
                                                
415
  Wholesalers and OTC market makers can execute orders themselves or instead further route the orders to 
other venues. An SDP always acts as the counterparty to any trade that occurs on the SDP. See Where Do 
Stocks Trade?, FINRA (Dec. 3, 2021), available at https://www.finra.org/investors/insights/where-do-
stocks-trade for further discussion.  
416
  See Rosenblatt Securities, Rosenblatt’s 2022 US Equity Trading Venue Guide (May 24, 2022), available at 
https://www.rblt.com/market-reports/rosenblatts-2021-us-equity-trading-venue-guide-2. The study also 
found that SDPs accounted for approximately 10% of off-exchange trading volume in Q1 2022 
417
  See, e.g., Robert H. Battalio, Brian C. Hatch & Mehmet Saglam, The Cost of Exposing Large Institutional 
Orders to Electronic Liquidity Providers (last revised Nov. 7, 2022) (unpublished manuscript), available at 
https://ssrn.com/abstract=3281324 (retrieved from Elsevier database).  

210 
 
reduces their orders’ price impact and avoids triggering significant reactions by other market 
participants.  
 
The wholesaler business model relies in part on segmentation and internalization of 
marketable order flow of individual investors, which is characterized by low adverse selection 
risk. An analysis of the execution quality of market and marketable limit orders handled by 
wholesalers retrieved from Rule 605 reports
418
 and presented in Table 5
419
 shows that orders in 
NMS stocks handled by wholesalers are associated with lower price impact
420
 compared to those 
executed on exchanges, indicating that orders handled by wholesalers on average have lower 
                                                
418
  Rule 605 requires market centers to make available, on a monthly basis, standardized information 
concerning execution quality for covered orders in NMS stocks that they received for execution. See 17 
CFR 242.605. Covered orders are defined in 17 CFR 242.600(b)(22) to include orders (including 
immediate-or-cancel orders) received by market centers during regular trading hours at a time when a 
national best bid and national best offer is being disseminated, and, if executed, is executed during regular 
trading hours, and excludes orders for which the customer requests special handling for execution (such as 
not held orders). Rule 605 reports are required to contain a number of execution quality metrics for covered 
orders, including statistics for all NMLOs with limit prices within ten cents of the NBBO at the time of 
order receipt as well as separate statistics for market orders and marketable limit orders. Under the Rule, 
the information is categorized by individual security, one of five order type categories (see 17 CFR 
242.600(b)(14)), and one of four order size categories, which does not include orders for less than 100 
shares or orders greater than or equal to 10,000 shares (see 17 CFR 242.600(b)(11)). As such, Rule 605 
does not require reporting for orders smaller than 100 shares, including odd-lot orders. Rule 605 requires 
market centers to report execution quality information for all covered orders that the market center receives 
for execution, including orders that are executed at another venue (i.e., because they are effectively 
rerouted to another trading center by the market center). 
419
  The following filters were applied to the Rule 605 data to remove potential data errors: Observations where 
the total shares in covered orders were less than the sum of the canceled shares, share executed at the 
market center, and share executed away from the market center were deleted; Observations with missing 
order size code, order type code, total covered shares, or total covered orders were deleted; Realized and 
effective spread values are set to missing values if the total shares executed at and away from the market 
center are zero; and Per share dollar realized spreads, per share dollar effective spreads, and per share dollar 
price improvements were winsorized at 20% of the volume weighted average price of the stock for the 
month as calculated from NYSE Daily TAQ data. 
420
  See supra note 365 and accompanying text for a definition and discussion of price impact. Table 5 
estimates the average price impact associated with marketable orders routed to wholesalers to be 1.2 bps. 
This means that for a $10 stock the NBBO midpoint would move up (down) by an average of 0.12 cents in 
the five minutes following the execution of marketable buy (sell) order. 

211 
 
adverse selection costs.
421
 This lower adverse selection cost allows wholesalers to provide these 
orders with better execution quality, manifested in lower effective spreads
422
 and E/Q ratios 
compared to exchanges. The realized spreads
423
 observed in Table 5
424
 adjust effective spreads 
for adverse selection costs (i.e., price impact).
425
 Thus orders handled by wholesalers have higher 
realized spreads, despite the fact that they may execute at better prices than those received by 
and executed on exchanges, as observed by their lower effective spreads in Table 5.  
                                                
421
  Once implemented, the changes to the current arrangements for consolidated market data in the MDI 
Adopting Release, 86 FR at 18621, may impact the numbers in Table 5, including by reducing those for 
realized spread, effective spread, and amount of price improvement. The NBBO will narrow in stocks 
priced greater than $250 because it will be calculated based off a smaller round lot size. This narrower 
NBBO will decrease price improvement statistics in Rule 605 reports, which is measured against the 
NBBO. The effects on effective and realized spreads is more uncertain, because they are measured against 
the NBBO midpoint, which may not change if both the NBB and NBO decrease by the same amount. 
However, if marketable orders are more likely to be submitted when there are imbalances on the opposite 
side of the limit order book (i.e., more marketable buy orders are submitted when there is more size on the 
offer side of the limit order book than the bid side), then the NBBO midpoint may change such that it is 
closer to the quote the marketable order executes against, which may decrease the effective and realized 
spreads in stocks above $250 when the MDI Rules are implemented. It is uncertain how likely this NBBO 
midpoint is to change. It is also uncertain how or to what degree these changes would differ between 
exchange and wholesaler Rule 605 reports. If both changed similarly, then there would not be changes in 
relative differences between their reported spread measures. See supra note 356.  
422
  See supra note 366 for a definition and discussion of effective spreads. 
423
  See supra note 367 and accompanying text for a definition and discussion of realized spreads as a measure 
of the economic profits earned by liquidity providers. See infra note 426 discussing the limitations of 
realized spreads for estimating the profits earned by market makers.  
424
  The exception to this result is market orders executed on exchanges, which have average higher realized 
spreads than wholesaler market orders. However, market orders represent only 0.2% of the overall 
marketable orders executed on exchanges and therefore do not accurately represent exchange realized 
spreads. More specifically, marketable limit orders executed on exchanges in Q1 2022 had a share volume 
of 179.10 billion shares while market orders executed on exchanges had a share volume of 0.39 billion 
shares. See infra Table 5. 
425
  The execution quality information required pursuant to Rule 605 combines information about orders 
executed at a market center with information on orders received for execution at a market center but 
executed by another market center; see supra note 407. As such, the execution quality statistics presented in 
Table 5 include orders that are effectively rerouted by wholesalers. Furthermore, note that Rule 605 does 
not specifically require market centers to prepare separate execution quality reports for their SDPs, and as 
such these calculations reflect all covered market and marketable limit orders in NMS stocks received and 
executed by wholesalers, including those on SDPs.  

212 
 
Realized spreads are a proxy
 
for the potential economic profit that liquidity suppliers may 
earn on a trade.
426
 Therefore, the higher realized spreads earned by wholesalers suggest that the 
isolation of individual investor orders routed to wholesalers results in wholesalers potentially 
earning higher economic profits relative to a venue where market makers compete with each 
other and other market participants to supply liquidity at the individual order level (e.g., an 
exchange). 
Additionally, the results in Table 5 show that approximately 79% of the executed dollar 
volume in marketable orders handled by wholesalers are market orders. The Commission 
believes that these outcomes reflect the heavy utilization of market orders for NMS stocks by 
individual investors whose orders are primarily handled by wholesalers, contrary to the heavy 
utilization of limit orders by other market participants. 
Table 5 also highlights significantly higher fill rates, i.e., the percentage of the shares in 
an order that execute in a trade, for marketable orders sent to wholesalers as compared to those 
                                                
426
  See supra note 367 for the definition of the realized spread. Realized spreads do not measure the actual 
trading profits that market makers earn from supplying liquidity. In order to estimate the trading profits that 
market makers earn, we would need to know at what times and prices the market maker executed the off-
setting position for a trade in which it supplied liquidity (e.g., the price at which the market maker later sold 
shares that it bought when it was supplying liquidity). If market makers offset their positions at a price and 
time that is different from the NBBO midpoint at the time lag used to compute the realized spread measure 
(Rule 605 realized spread statistics are measured against the NBBO midpoint 5 minutes after the execution 
takes place), then the realized spread measure is an imprecise proxy for the profits market makers earn 
supplying liquidity. See Conrad and Wahal (2020) (for discussions showing how realized spreads decline 
when measured over time horizons and for further discussions regarding how realized spreads are affected 
when measured over different time horizons). Differences in inventory holding periods of different market 
makers could also create differences in the trading profits that market makers earn that would not be 
captured in the realized spread measure if it is estimated over the same time horizon for all market makers. 
See Lingyan Yang & Ariel Lohr, The Profitability of Liquidity Provision (last revised Feb. 18, 2022) 
(unpublished manuscript), available at https://ssrn.com/abstract=4033802. Additionally, realized spread 
metrics do not take into account any transaction rebates or fees, including PFOF, that a market maker might 
earn or pay, which would also affect the profits they earn when supplying liquidity. Furthermore, realized 
spreads also do not account for other costs that market makers may incur, such as fixed costs for setting up 
their trading infrastructure and costs for connecting to trading venues and receiving market data.  

213 
 
sent to exchanges.
427
 Wholesalers execute the vast majority of orders that they receive against 
their own capital, i.e., they internalize the vast majority of orders they receive.
428
 Wholesalers 
expose themselves to inventory risk when internalizing order flow, but mitigate this risk by 
internalizing orders that possess low adverse selection risks.  
                                                
427
  Marketable orders may not fully execute if there isn’t sufficient liquidity on the exchange to fill the orders 
within their limit price and/or if they contain other instructions that limit their execution, such as if they are 
designated as IOC orders or there are instructions not to route the orders to another exchange. 
428
  See analysis in infra Table 10 and corresponding discussion. 

214 
 
Table 5: Comparison of Rule 605 Execution Quality Statistics Between Exchanges and Wholesalers for NMS 
Common Stocks and ETFs in Q1 2022 
 
Combined Marketable 
Orders 
Market Marketable Limit 
 
WH EX WH EX WH EX 
Average Price $47.89 $58.14 $56.19 $85.45 $30.66 $58.08 
Share Volume (billion shares) 106.97 179.49 72.20 0.39 34.77 179.10 
Dollar Volume (billion $) $5,122.91 $10,436.02 $4,056.85 $33.53 $1,066.06 $10,402.49 
Fill Rate (%) 69.32% 25.77% 99.79% 58.08% 34.81% 25.77% 
Effective Spread (bps) 1.81 2.06 1.47 3.29 3.11 2.06 
Realized Spread (bps) 0.61 -0.38 0.39 2.40 1.43 -0.39 
Price Impact (bps) 1.20 2.44 1.08 0.90 1.68 2.45 
E/Q ratio 0.48 1.01 0.40 1.65 0.83 1.01 
Pct of Shares Price Improved 83.17% 8.78% 88.99% 15.95% 61.01% 8.75% 
Conditional Amount of Price 
Improvement (bps) 
2.17 1.50 2.33 1.92 1.24 1.50 
This table computes aggregated execution quality statistics for marketable covered orders received by exchanges and 
wholesalers from Rule 605 reports for Q1 2022 for NMS common stocks and ETFs. See supra note 418 for a definition 
of covered orders. Individual wholesaler and exchange Rule 605 reports are aggregated together at the stock-month 
level, into two categories, WH and EX, such that aggregate execution quality data is averaged for, a) wholesalers (WH) 
and, b) exchanges (EX), for each stock during each month.  
The following metrics were calculated: Average Price is the stock’s average execution price from the Rule 605 data 
(Dollar Volume/Share Volume), Share Volume is the total executed shares (in billions) from the Rule 605 data. Dollar 
Volume is the total executed dollar volume (in billions), calculated as the executed share volume from the Rule 605 data 
multiplied by the stock’s monthly VWAP price, as derived from NYSE Daily Trade and Quote data (TAQ). Fill Rate is 
the weighted average of the stock-month total executed share volume/total covered shares from the Rule 605 data. 
Effective Spread is the weighted average of the stock-month percentage effective half spread in basis points (bps). 
Realized Spread is the weighted average of the stock-month percentage realized half spread in basis points (bps). Price 
Impact is the weighted average of the stock-month percentage price impact in basis points (bps). E/Q ratio is the 
weighted average of the stock-month ratio of the effective spread/quoted spread. Pct of Shares Price Improved is the 
weighted average of the stock-month ratio of shares executed with price improvement/total executed share volume. 
Conditional Amount of Price Improvement is the weighted average of the stock-month of the amount of percentage 
price improvement in basis points (bps), conditional on the executed share receiving price improvement. 
Aggregated effective and realized percentage spreads are measured in half spreads in order to show the average cost of 
an individual investor order and are calculated by dividing the aggregated Rule 605 reported per share dollar amount by 
twice the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data 
(TAQ), for trades executed during regular market hours during the month. Percentage price impact is calculated as the 
aggregated Rule 605 reported per share dollar effective spreads minus per share dollar realized spreads divided by twice 
the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data 
(TAQ). Percentage amount of price improvement is calculated as the aggregated Rule 605 reported per share dollar 
amount of price improvement divided by the stock’s monthly volume weighed average price (VWAP), as derived from 
NYSE Daily Trade and Quote data (TAQ). Percentage spreads and amount of price improvement percentages are 
reported in basis points (bps). The Combined Market and Marketable Limit order type category is constructed for each 
security-month-order size category by combining the market and marketable limit order categories and computing the 
total and share weighted average metrics for the order size category for each security-month.  

215 
 
The sample includes NMS common stocks and ETFs that are present in the CRSP 1925 US Stock Database, Ctr. Rsch. 
Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. 
Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not have to be in 
the CRSP 1925 US Indices Database to be included in the analysis. NMS Common stocks and ETFs are identified, 
respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’. For each stock-month-order-type (such 
that aggregate execution quality data is averaged for, a) wholesalers and, b) exchanges, for each stock during each 
month) the per dollar share weighted measures from Rule 605 reports are aggregated together by share-weighting 
across different trading venues and order-size categories within the stock-month-order-type and venue type (i.e. trading 
venue Rule 605 reports for exchanges and wholesalers are aggregated into different categories). Percent values are then 
calculated for each stock month by dividing by the stock’s monthly volume weighed average price (VWAP). These 
percentage stock-month values are averaged together into order-type categories (market orders, marketable limit 
orders, and the combined market and marketable limit order type category, for both wholesalers and exchanges) based 
on weighting by the total dollar trading volume for the wholesaler or exchange category in that stock-month-order 
type, where dollar trading volume is estimated by multiplying the Rule 605 report total executed share volume, i.e., the 
share volume executed at market center + share volume executed away from the market center, for the stock-month-
order type by the stock’s monthly VWAP. See supra note 419 for a discussion of filters that were applied to the Rule 
605 data in this analysis.  
Because segmented orders valued at $200,000 and greater would be excepted from 
Proposed Rule 615,
429
 we limit our analysis to Rule 605 order size categories where the average 
dollar value of orders received by wholesalers was under $200,000.
430
 Table 6 summarizes Rule 
605 data comparing the execution quality of marketable orders (i.e., the combined market and 
marketable limit order category in Table 5) under $200,000 routed to wholesalers and exchanges 
for different security types.
431
 In Table 6, the average realized spreads for marketable orders 
routed to exchanges are negative for all security types,
432
 while orders routed to wholesalers have 
                                                
429
  See supra section IV.B.5 discussing exceptions to the Proposed Rule  
430
  We estimated the average dollar value of the orders received by wholesalers based on their Rule 605 
reports by multiplying the average order size for a stock-month-order-size-category (estimated as the 
number of total covered shares divided by the number of total covered orders) by the stock’s average 
monthly VWAP price estimated from NYSE TAQ data.  
431
  Both the wholesaler and exchange average execution metrics in Table 6 are calculated based on weighting 
by the total wholesaler dollar trading volume in that stock-month. This weighting method calculates 
averages across stocks similarly for exchanges and wholesalers when aggregating their Rule 605 reports, 
which helps ensure the averages across stocks are comparable between exchanges and wholesalers. 
432
  A negative average realized spread on exchanges does not necessarily mean that market makers on 
exchanges are not earning trading profits for supplying liquidity on exchanges. The realized spread 
observed on exchanges is a mix of liquidity supplied by market makers and limit orders submitted by other 
traders who may be interested in trading but not earning a spread (e.g., limit or midpoint orders of 
individual or institutional investors that potentially don’t want to pay the spread to trade). Additionally, as 
discussed in supra note 426, the realized spread is a proxy and does not measure the actual trading profits 
that market makers earn from supplying liquidity. It does not include exchange rebates liquidity suppliers 

216 
 
positive realized spreads in all securities, with larger realized spreads in Non-S&P 500 stocks. 
The positive realized spreads for marketable orders routed to wholesalers seem to indicate that 
the amount of price improvement these orders receive in the form of lower effective spreads does 
not fully offset the lower adverse selection costs they impose on liquidity suppliers (as measured 
by lower price impacts) compared to negative realized spreads for orders routed to exchanges.
433
 
                                                
may earn and also makes assumptions about the time and price at which the liquidity suppliers exit the 
position. After accounting for exchange rebates, liquidity suppliers on exchanges could potentially earn 
average positive trading profits if they exit their positions at a different time or price than the estimated 
NBBO midpoint at the time horizon used to estimate the realized spread (5 minutes for realized spreads 
reported in Rule 605). See Conrad and Wahal (2020) for discussions on how realized spreads vary when 
calculated over different time horizons.  
433
  Other studies have also used realized spreads to examine competition between liquidity suppliers. See, e.g., 
Roger Huang & Hans Stoll, Dealer versus auction markets: A paired comparison of execution costs on 
NASDAQ and the NYSE, 41 J. Fin. Econ. 313 (1996) (finding that in 1991 realized spreads for a sample of 
NASDAQ stocks were higher than realized spreads for a matched sample of NYSE stocks and concluding 
that important explanations for the higher spreads observed on NASDAQ were the internalization and 
preferencing of order flow and the presence of alternative interdealer trading systems, factors that limited 
dealers’ incentives to narrow spreads); Jonathan Brogaard & Corey Garriott, High-Frequency Trading 
Competition, 54 J. Fin. & Quantitative Analysis 1469 (2019) (looking at the effects of the entry of new 
high-frequency traders that compete to supply liquidity on the Canadian Alpha exchange and finding that 
realized spreads decreased for the marketable orders of non-high-frequency traders after new high-
frequency traders entered the market; the study observed that the reduction in realized spreads was not 
attributable to changes in the price impact of the orders of non-high-frequency traders and that the 
reduction in realized spreads was attributable to increased competition among liquidity suppliers); and 
Hank Bessembinder & Herbert Kaufman, A cross-exchange comparison of execution costs and information 
flow for NYSE-listed stocks, 46 J. Fin. Econ. 293 (1997) (finding in 1994 that effective bid-ask spreads for 
trades in NYSE issues completed on the NYSE are slightly smaller than for trades completed with the 
NASD dealer market and the regional stock exchanges but the realized bid-ask spreads for trades on the 
NYSE are lower by a factor of two to three; the authors conclude that this differential is attributable to the 
successful 'cream skimming' of uninformed trades by market makers off of the NYSE exchange; the 
authors also raise concerns as to whether the trades being diverted from the NYSE might have received 
better execution if they were not diverted and whether existing rules governing order flow effectively 
fostered competition). 
 

217 
 
Table 6 also shows realized spreads adjusted to reflect share-level PFOF payments paid 
by wholesalers
434
 and rebates paid by exchanges.
435
 After these respective costs are netted out, 
although wholesaler realized spreads are reduced and exchange realized spreads increase (i.e., 
are less negative), wholesaler realized spreads continue to exceed exchange realized spreads. 
Adjusting for rebates on the one hand and PFOF on the other allows us to estimate a marginal 
profit to a liquidity supplier in each venue (note that a rebate substitutes one-for-one with a 
spread, as does PFOF, and in an idealized perfect-competition setting both would be zero). 
Acknowledging that there may be differences not captured by these measures, this calculation 
suggests a higher marginal profit for orders off-exchange versus on-exchange, and suggests 
greater on-exchange competition.
436
 While an accounting measure of profit would need to take, 
                                                
434
  Wholesaler realized spreads are adjusted to account for the PFOF they pay to retail brokers. Because we are 
not able to identify the broker-dealer from which the orders originated in Rule 605 reports, we estimate 
PFOF rates for the Rule 605 data sample by multiplying the estimated PFOF rates retail brokers receive in 
Table 2 by 74% in order to adjust for an estimated 26% of the marketable order flow wholesalers receive 
coming from retail brokers that do not accept PFOF, as estimated by the percentage of share volume 
received from non-PFOF brokers in infra Table 14. The estimated PFOF rates are 12 mils for market orders 
in S&P 500 stocks, 10 mils for market orders in ETFs and non-S&P 500 stocks, 17 mils for marketable 
limit order in S&P 500 stocks, and 9 mils for marketable limit orders in ETFs and non-S&P 500 stocks. For 
the Rule 605 data sample, the wholesalers’ PFOF adjusted realized spread is computed by subtracting the 
relevant PFOF rate from a stock’s average dollar realized spread for orders routed to wholesalers and then 
dividing by twice the stock’s average monthly VWAP price estimated from NYSE TAQ data.  
435
  Estimates of exchange rebates that liquidity suppliers earn on maker-taker venues and the fees they pay on 
inverted and flat fee venues are assumed as follows: exchange rebates to liquidity suppliers on maker-taker 
venues are 27 mils; exchange fees for supplying liquidity on inverted venues are 15 mils; exchange fees for 
supplying liquidity on flat fee venues are 7 mils; and there is no fee on exchanges that do not charge fees 
and rebates. Exchange rebates are assumed to be 27 mils based on the average rate exchanges pay retail 
brokers for their non-marketable limit orders in Table 2. Fee rates for inverted and flat fee venues (which 
charge fees to both liquidity suppliers and demanders and do not pay rebates) were estimated based on 
exchange fee and rebate tables and were adjusted by 3 mils to account for volume-based tiering (for 
inverted venues) or differences in fees supplying liquidity using displayed vs. non-displayed orders (for flat 
fee venues). For both the Rule 605 and CAT data samples (see infra Table 7), a stock’s rebate adjusted 
exchange realized spread is calculated by adding/subtracting the exchange rebate/fee to/from the average 
dollar realized spread and then dividing by twice the stock’s average monthly VWAP price estimated from 
NYSE TAQ data.  
436
  One caveat to the difference in transaction costs on and off-exchange is that, on-exchange execution, to the 
extent it is driven by institutional order flow, may be accompanied by commissions. While this should not 
affect the interpretation of realized spreads as marginal profit to liquidity provision, it does reflect the 
interpretation as either the transaction cost of the customer or marginal profit of the liquidity supplier 
handling customer order flow. 

218 
 
say, fixed costs into account, fixed costs alone would not explain the difference as liquidity 
suppliers on both types of venues may have similar fixed costs.  

219 
 
Table 6: Rule 605 Wholesaler (WH) and Exchange (EX) Execution Quality Comparison for Marketable 
Orders under $200,000 for Q1 2022 by Security Type 
 
All NMS 
Stocks 
S&P 500 Non-S&P 500 ETF 
Average Price $33.99 $97.03 $13.52 $51.19 
WH Share Volume (billion shares) 96.51 15.00 62.32 19.18 
WH Dollar Volume (billion $) $3,280.03 $1,455.40 $842.66 $981.98 
EX Share Volume (billion shares) 172.08 39.89 86.67 45.52 
EX Dollar Volume (billion $) $9,025.52 $3,448.64 $1,899.61 $3,677.27 
WH Fill Rate (%) 69.06% 73.17% 66.65% 65.03% 
EX Fill Rate (%) 27.31% 32.53% 29.56% 17.63% 
WH Effective Spread (bps) 2.05 0.72 5.70 0.89 
EX Effective Spread (bps) 3.11 1.45 7.86 1.49 
WH Realized Spread (bps) 0.72 0.30 1.55 0.64 
EX Realized Spread (bps) -0.67 -0.30 -1.97 -0.12 
WH Realized Spread Adj PFOF (bps) 0.43 0.17 0.86 0.45 
EX Realized Spread Adj Rebate (bps) -0.001 -0.05 -0.24 0.28 
WH Price Impact (bps) 1.33 0.42 4.15 0.25 
EX Price Impact (bps) 3.78 1.74 9.83 1.61 
WH E/Q Ratio 0.42 0.35 0.49 0.45 
EX E/Q Ratio 1.00 0.98 1.00 1.01 
WH % Pct of Shares Price Improved 84.7% 86.7% 82.5% 83.4% 
EX % Pct of Shares Price Improved 8.8% 10.9% 9.5% 5.2% 
WH Conditional Amount of Price 
Improvement (bps) 
2.62 1.49 6.27 1.17 
EX Conditional Amount of Price 
Improvement (bps) 
2.36 1.04 5.88 1.28 
This table compares aggregated execution quality statistics broken out for different security types for marketable 
covered orders with average order size under $200,000 received by exchanges and wholesalers as reported from 
Rule 605 reports for Q1 2022 for NMS common stocks and ETFs. See supra note 418 for a definition of covered 
orders. Individual wholesaler and exchange Rule 605 reports are aggregated together at the stock-month level into 
two categories, EX and WH. EX shows aggregated statistics from Rule 605 reports from exchanges and WH 
shows aggregated statistics from Rule 605 reports from wholesalers. Marketable orders are constructed separately 
for wholesalers and exchanges by combining the Market and Marketable Limit order type categories in Rule 605 
reports for each security-month-order size category and computing the total and share weighted average metrics 
from the combined order types for the order size category for each security-month.  
See supra Table 5 for the descriptions of the reported metrics: Average Price, Share Volume, Dollar Volume, Fill 
Rate, Effective spread, Realized spread, Price Impact, E/Q Ratio, Pct Shares Price Improved, and Conditional 
Amount of Price Improvement. WH Realized Spread Adj PFOF is the weighted average of the stock-month 
percentage realized half spread in basis points (bps) from wholesaler 605 reports after adjusting for the estimated 
PFOF paid by the wholesaler using the methodology described in supra note 434. EX Realized Spread Adj 
Rebate is the weighted average of the stock-month percentage realized half spread in basis points (bps) from 
exchange 605 reports after adjusting for the estimated rebates (access fees) exchanges pay (charge) to liquidity 
suppliers using the methodology described in supra note 435. 
Percentage spreads are measured in half spreads in order to show the average cost of an individual investor order 
and are calculated by dividing the Rule 605 report per share dollar amount by twice the stock’s monthly VWAP, 
as derived from NYSE Daily Trade and Quote data (TAQ), for trades executed during regular market hours 
during the month. Percentage spreads are reported in basis points (bps).  

220 
 
The sample includes NMS common stocks and ETFs that are present in the CRSP 1925 US Stock Database, Ctr. 
Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, 
U. Chi. Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not 
have to be in the CRSP 1925 US Indices Database to be included in the analysis. NMS Common stocks and ETFs 
are identified, respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF. The exchange and 
wholesaler metrics in the table are each reported for the combined marketable order type, which was constructed 
for this analysis separately for exchange and wholesalers by combining the Market and Marketable Limit order 
type categories in Rule 605 reports at the stock-month-order-size level and computing the total and share 
weighted average metrics from the combined order types. For each stock-month, share weighted metrics (for both 
exchange and wholesalers) are then calculated by share-weighting across different order-size categories based on 
the number of shares executed (at the market center + away) in wholesalers’ Rule 605 reports in that order-size 
category. Order size categories with wholesaler average order dollar values greater than or equal to $200,000 
were excluded. The average order dollar values were determined for each order-size category stock-month by 
dividing the wholesaler total number of covered shares in the order size category by the wholesaler total number 
of covered orders and then multiplying by the stock-month’s average VWAP, as derived from NYSE Daily Trade 
and Quote data (TAQ). Stock-month values are averaged together (for both wholesalers and exchanges) based on 
weighting by the total wholesaler dollar trading volume in that stock-month for the combined marketable order 
type (wholesaler dollar trading volume is estimated by multiplying the Rule 605 report wholesaler total executed 
share volume, i.e., the share volume executed at market center + share volume executed away from the market 
center, for the stock-month-order type by the stock’s monthly VWAP). This weighting method calculates 
averages across stocks similarly for exchanges and wholesalers when aggregating their Rule 605 reports, which 
helps ensure the averages across stocks are comparable between exchanges and wholesalers. See supra note 419 
for a discussion of filters that were applied to the Rule 605 data in this analysis. 
Because Rule 605 requires market centers to report execution quality statistics only for 
covered orders that fall within specific order size and type categories,
437
 a number of order types 
and sizes that may be particularly relevant for individual investors are excluded from the above 
analyses, including orders for less than 100 shares.
438
 Additionally Rule 605 data does not allow 
us to distinguish between orders that wholesalers execute on a principal basis from those they 
execute on riskless principal basis, since they are both reported as being executed at the market 
center. Furthermore, it is not possible in Rule 605 data to distinguish between orders that a 
wholesaler received from individual investors from those it received from other types of market 
                                                
437
  See supra note 407 for a definition of covered orders and a discussion of the order type and size categories 
included in Rule 605 reporting requirements. 
438
  There is evidence that individual investors tend to use smaller trading sizes. See, e.g., Robert P. Bartlett, 
Justin McCrary & Maureen O’Hara, The Market Inside the Market: Odd-Lot Quotes (last revised Feb. 11, 
2022) (unpublished manuscript), available at https://ssrn.com/abstract=4027099 (retrieved from 
Elsevier database); Matthew Healey, An In-Depth View Into Odd Lots, Cboe (Oct. 2021), available at 
https://www.cboe.com/insights/posts/an-in-depth-view-into-odd-lots/. 

221 
 
participants. For example, wholesaler Rule 605 reports may include both individual investor 
orders that they receive, as well as institutional orders they receive on their SDPs. Lastly, 
effective and realized spread measures as required to be reported in Rule 605 reports are 
calculated using a five-minute time horizon, which some academic literature argues has become 
inappropriate for a high-frequency environment.
439
 Therefore, to supplement the analyses using 
Rule 605 data and test for the robustness of the results
440
 that it generated, CAT data
441
 was 
analyzed to look at the execution quality of marketable orders of individual investors in NMS 
Common Stocks and ETFs that were less than $200,000 in value and that executed and were 
handled by wholesalers during Q1 2022 (“CAT retail analysis”).
442
 This was compared to a 
                                                
439
  See, e.g., Maureen O’Hara, High Frequency Market Microstructure, 116 J. Fin. Econ. 257 (2015) (“O’Hara 
2015”); Maureen O’Hara, Gideon Saar & Zhuo Zhong, Relative Tick Size and the Trading Environment, 9 
Rev. of Asset Pricing Stud. 47 (2019) (“O’Hara et al.”); Jennifer S. Conrad & Sunil Wahal, The Term 
Structure of Liquidity Provision, 136 J. Fin. Econ. 239 (2020) (“Conrad and Wahal”). Conrad and Wahal 
suggest that a one-minute horizon may be appropriate for small stocks, and a 15-second horizon may be 
appropriate for large stocks. The following analyses using CAT data will use a one-minute horizon for 
calculating the realized spread; see supra note 50. 
440
  Rule 605 data is publicly available and the consistency of the results generated by analysis of these data 
supports the veracity of the results generated by CAT data, despite the fact that CAT data is not publicly 
available. 
441
 This analysis used CAT data to examine the execution quality of marketable orders in NMS Common 
stocks and ETFs that belonged to accounts with a CAT account type of “Individual Customer” and that 
originated from a broker-dealer MPID that originated orders from 10,000 or more unique “Individual 
Customer” accounts during Jan. 2022. The number of unique “Individual Customer” accounts associated 
with each MPID was calculated as the number for unique customer account identifiers with an account 
customer type of “Individual Customer” that originated at least one order during the month of Jan. 2022. 
The Commission found that 58 broker-dealer MPIDs associated with 54 different broker-dealers originated 
orders from 10,000 or more unique Individual Customer accounts in Jan. 2022. As discussed in supra note 
194, the CAT account type “Individual Customer” may not be limited to individual investors because it 
includes natural persons as well as corporate entities that do not meet the definitions for other account 
types. The Commission restricted that analysis to MPIDs that originated orders from 10,000 or more 
“Individual Customer” accounts in order to ensure that these MPIDs are likely to be associated with retail 
brokers to help ensure that the sample is more likely to contain marketable orders originating from 
individual investors. NMS Common stocks and ETFs are identified, respectively, as securities in TAQ with 
a Security Type Code of “A” and “ETF.” 
442
  Fractional share orders with share quantity less than one share were excluded from the analysis. The 
analysis included market and marketable limit orders that originated from one of the 58 retail broker 
MPIDs and were received by a market center that was associated with one of the six wholesalers CRD 
numbers (FINRA’s Central Registration Depository number) during some point in the order’s lifecycle. 
Orders that were received by the wholesaler or executed outside of normal market hours were excluded. 

222 
 
sample of CAT data examining the execution quality of executed market and marketable limit 
orders in NMS Common Stocks and ETFs received by exchanges that were less than $200,000 in 
value over the same time period (“CAT exchange analysis”).
443
 
                                                
Orders were also excluded if they had certain special handling codes so that execution quality statistics 
would not be skewed by orders being limited in handling by special instructions (e.g., pegged orders, stop 
orders, post only orders, etc.) Orders identified in CAT as Market and Limit orders with no special 
handling codes or one of the following special handling codes were included in the analysis: NH (not held), 
CASH (cash), DISQ (display quantity), RLO (retail liquidity order), and DNR (do not reduce). These 
special handling codes were identified based on their common use by retail brokers and descriptions of 
their special handling codes. The marketability of a limit order was determined based on the consolidated 
market data feed NBBO at the time a wholesaler first receives the order. Limit orders that were not 
marketable were excluded. The dollar value of an order was determined by multiplying the order’s number 
of shares by either its limit price, in the case of a limit order, or by the far side quote (i.e., NBO for a 
market buy order and NBB for a market sell) of the consolidated market data feed NBBO at the time the 
order was first received by a wholesaler, in the case of a market order. Orders with dollar values greater 
than or equal to $200,000 were excluded from the analysis. The analysis includes NMS Common Stocks 
and ETFs (identified by security type codes of ‘A’ and ‘ETF’ in NYSE TAQ data) that are also present in 
CRSP data. Price improvement, effective spreads, realized spreads, quoted spreads, and price impacts were 
winsorized if they were greater than 20% of a stock’s VWAP during a stock-week. See Table 7 for a 
detailed description of the analysis. 
443
  The Commission analysis used CAT data to examine the execution quality of market and marketable limit 
orders in NMS Common Stocks and ETFs that were under $200,000 in value that were received and 
executed by exchanges during normal market hours in Q1 2022. The analysis employed filters to clean the 
data and account for potential data errors. The analysis is limited to orders identified in CAT as market and 
limit orders accepted by exchanges. Orders were excluded from the analysis if they had certain special 
handling codes, such as post or add-liquidity only orders, midpoint orders, orders that can only execute in 
opening and closing auctions, orders with a minimum execution quantity, pegged orders, or stop order or 
stop-loss orders. Orders were also required to execute in normal trades during normal trading hours to be 
included in the analysis. Normal trades are identified in CAT data by sale conditions “blank, @, E, F, I, S, 
Y” which correspond to regular trades, intermarket sweep orders, odd lot trades, split trades, and yellow 
flag regular trades. For orders submitted to exchanges, the NBBO the exchange records seeing at the time 
of order receipt is used to measure the NBBO and NBBO midpoint for calculating statistics that are based 
on the time of order receipt (e.g., effective spreads, price improvement, quoted spreads, etc.). The 
marketability of exchange orders was determined based on the NBBO observed by the exchange at the time 
of order receipt. The dollar value for a market order was calculated as the price of the far side NBBO quote 
(NBO for a market buy order and NBB for a market sell) times the shares in the order. The dollar value for 
a limit order was calculated as the price of the limit order times the number of shares in the order. Orders 
with dollar values greater than or equal to $200,000 were excluded from the analysis. The consolidated 
market data feed NBBO was used to calculate statistics that use the NBBO or NBBO one minute after 
execution (e.g., realized spreads, price impacts, etc). The analysis includes NMS Common Stocks and 
ETFs (identified by security type codes of ‘A’ and ‘ETF’ in NYSE TAQ data) that are also present in 
CRSP data. Price improvement, effective spreads, realized spreads, quoted spreads, and price impacts were 
winsorized if they were greater than 20% of a stock’s VWAP during a stock-week. See Table 7 for a 
detailed description of the analysis.  

223 
 
Table 7, which reports results from CAT data, contains some statistics that are not 
available in Rule 605 reports, including statistics on midpoint executions and sub-penny 
trades.
444
 In NMS common stock and ETF orders, wholesalers execute approximately 44% of 
shares at prices at or better than the NBBO midpoint. However, wholesalers also offer less than 
0.1 cents price improvement to approximately 18.6% of shares that they execute. Wholesalers 
execute more than 65% of shares at sub-penny prices, with over 40% of shares being executed at 
prices with four decimal points (i.e., the fourth decimal place is not equal to zero).  
Results from this analysis are highly consistent with results from the analysis of Rule 605 
data from Table 6. Specifically, wholesalers display lower price impacts and E/Q ratios, 
indicating that orders internalized by wholesalers receive better execution quality than orders 
executed on exchanges. Despite this enhanced execution quality, realized spreads of wholesalers 
exceed those produced by exchanges.
445
 This finding remains even after netting out PFOF 
payments made by wholesalers
446
 and rebates made by exchanges.
447
 
  
                                                
444
  Certain items in Table 7 may also be affected by the MDI rules once they are implemented. See supra notes 
356 and 421. 
445
  The relative differences between exchanges and wholesalers in price impacts and realized spreads are even 
more pronounced with the CAT data, which (unlike 605 data) include odd lots, exclude orders greater than 
$200,000, and measure realized spreads from 1 minute rather than 5 minutes after execution. 
446
  For CAT data, we estimate the PFOF each retail broker receives based on data from their Q1 Rule 606 
reports. For each month we separately estimate the average per share PFOF rate they receive from 
wholesalers based on the order type (market and marketable limit orders) and security type (S&P500 and 
non-S&P500 stocks), which we then combine with the same order and stock type in the CAT data. If a 
retail broker does not produce a Rule 606 report, then we use the PFOF rates from its clearing broker’s 
Rule 606 report, if it is available (some retail brokers’ websites disclosed that they share in payments their 
clearing broker receives for their order flow).  A PFOF rate of 20 cents per 100 shares was used for the 
introducing broker-dealers and clearing broker that reported handled orders on a not held basis and did not 
disclose PFOF information in their Rule 606 report but disclosed on their website that they received PFOF 
for their order flow. 20 cents per 100 shares was the PFOF rate that the clearing broker that handles orders 
on a not held basis disclosed on their website that they received. 
447
  See supra note 435 for discussion of how exchange rebates are calculated. 

224 
 
  
Table 7: Wholesaler CAT Analysis of Exchange Individual Investor Order Execution Quality for 
Marketable Orders in NMS Common Stocks and ETFs by Type of Stock 
Panel A: Wholesaler and Exchange Execution Quality 
Variable All SP500 NonSP500 ETF 
Average Price $29.87 $110.31 $10.52 $53.14 
WH Principal Execution Rate 90.44% 93.07% 87.66% 88.12% 
WH Share Volume (billion shares) 87.11 11.63 63.17 12.31 
EX Share Volume (billion shares) 281.90 66.98 140.82 74.10 
WH Dollar Volume (billion $) $2,601.44 $1,282.62 $664.41 $654.41 
EX Dollar Volume (billion $) $16,194.84 $6,479.89 $3,246.09 $6,468.85 
WH Effective Spread (bps) 2.11 0.67 6.23 0.76 
EX Effective Spread (bps) 3.18 1.52 8.11 1.42 
WH Realized Spread (bps) 0.85 0.42 2.00 0.51 
EX Realized Spread (bps) -1.22 -0.28 -3.90 -0.34 
WH Realized Spread Adj PFOF (bps) 0.49 0.29 0.99 0.36 
EX Realized Spread Adj Rebate (bps) -0.40 -0.06 -1.54 0.08 
WH Price Impact (bps) 1.26 0.25 4.22 0.25 
EX Price Impact (bps) 4.40 1.80 12.00 1.75 
WH E/Q Ratio 0.39 0.32 0.50 0.41 
EX E/Q Ratio 1.04 1.01 0.98 1.17 
Panel B: Wholesaler Price Improvement 
Variable All SP500 NonSP500 ETF 
WH Pct Executed with Price Improvement 89.95% 93.33% 85.43% 87.93% 
WH Conditional Amount Price 
Improvement (bps) 
2.54 1.47 6.16 0.99 
WH Pct Shares Executed at Midpoint or 
Better 
44.57% 47.37% 39.76% 43.97% 
WH Pct Shares Executed at Midpoint 31.69% 32.47% 28.46% 33.44% 
WH Pct Shares Executed at NBBO 8.38% 5.86% 10.97% 10.69% 

225 
 
WH Pct Shares Executed Outside NBBO 1.67% 0.81% 3.61% 1.38% 
WH Pct Shares Executed with <0.1 cent 
Price Improvement 
18.64% 16.62% 20.58% 20.64% 
WH Pct of Shares Executed as Subpenny 
Prices 
66.98% 65.10% 64.16% 73.55% 
WH Pct of Shares Executed at Subpenny 
Prices without Midpoint Trades 
47.60% 46.82% 47.03% 49.68% 
WH Pct of Shares Executed at Subpenny 
Prices with 4 Decimals 
41.36% 40.80% 41.76% 42.06% 

226 
 
This table uses CAT data to compare aggregated execution quality statistics for Q1 2022 broken out for different 
security types for executed marketable orders with order size under $200,000 in NMS Common Stocks and ETFs 
received by wholesalers from individual investors to similar orders received by exchanges. Aggregated statistics 
in the table labeled WH are based on analysis of CAT data of executed marketable orders in NMS Common 
Stocks and ETFs from individual investors for under $200,000 in value belonging to one of 58 retail broker 
MPIDs that were handled by one of 6 wholesalers during normal market hours in Q1 2022 (see supra note 442 for 
additional discussions on the CAT data used in the CAT retail analysis). Aggregated statistics in the table labeled 
EX are based on a corresponding analysis of CAT data of executed marketable orders in NMS Common Stocks 
and ETFs receive by exchanges that were under $200,000 in value and received and executed during normal 
market hours in Q1 2022 (see supra note 443 for additional discussions on the CAT data used in CAT exchange 
analysis). 
The following metrics are calculated for all stocks and for each of the stock-types. EX indicates aggregated 
statistics for executed marketable orders routed to exchanges and WH indicates aggregated statistics for executed 
marketable orders from individual investors that were routed to wholesalers. Average Price is the average 
execution price. WH Principal Execution Rate is the percentage of dollar volume of individual investor trades 
that a wholesaler executed in a principal capacity. Share Volume is the total executed share volume. Dollar 
Volume is the total executed dollar volume. Effective Spread is the weighted average of the percentage effective 
half spread in basis points (bps) (measured as average (execution price – NBBO midpoint at time of order receipt) 
* average transaction price). Realized Spread is the weighted average of the percentage one minute realized 
spread in bps (measured as average (execution price – NBBO midpoint one minute after execution) * average 
transaction price). WH Realized Spread Adj PFOF is the estimated realized spread in bps earned by the 
wholesaler after adjusting the realized spread for the estimated PFOF they pay to retail brokers (see supra note 
446 for further details on adjusting wholesaler realized spreads for PFOF in CAT data). EX Realized Spread Adj 
Rebate is the estimated realized spread in bps earned by exchange liquidity suppliers after adjusting the realized 
spread for the estimated exchange rebates they receive or access fees they pay for supplying liquidity (see supra 
note 435 for further details on adjusting realized spreads for exchange fees and rebates). Price Impact is the 
weighted average of the percentage one-minute price impact spread in bps (measured as average (NBBO 
midpoint one minute after execution - NBBO midpoint at time of order receipt) / average transaction price). E/Q 
Ratio is the weighted average of the ratio of the effective dollar spread divided by its quoted spread at the time of 
order receipt. WH Pct Executed with Price Improvement is the weighted average of the percentage of share 
volume that is routed to wholesalers and executed at a price better than the NBBO. WH Conditional Amount 
Price Improvement is the weighted average amount of percentage price improvement given by wholesalers 
conditional on the order receiving price improvement in bps (measured for a marketable buy order as average 
(NBO at time of order receipt – execution price) and measured for a marketable sell order as average (execution 
price - NBB at time of order receipt) and then dividing the difference by the average transaction price). WH Pct 
Share Executed at Midpoint or Better is the weighted average of the percentage of shares that are routed to a 
wholesaler and executed at prices equal to or better than the NBBO midpoint at the time of order receipt. WH Pct 
Share Executed at Midpoint is the weighted average of the percentage of shares that are routed to a wholesaler 
and executed at a price equal to the NBBO midpoint at the time of order receipt. WH Pct Shares Executed at 
NBBO is the weighted average of the percentage of share volume routed to a wholesaler and executed at the 
NBBO at the time of order receipt (executed at the NBB for marketable sell orders and the NBO for marketable 
buy orders). WH Pct Shares Executed Outside NBBO is the weighted average of the percentage of share volume 
routed to wholesalers and executed at prices outside the NBBO at the time of order receipt (executed at a price 
less than the NBB for marketable sell orders and a price greater than the NBO for marketable buy orders). WH 
Pct Shares Executed with <0.1 cent Price Improvement is the weighted average of the percentage of shares that 
are executed with an amount of price improvement less than 0.1 cents measured against the NBBO at the time of 
order receipt. WH Pct Shares Executed Subpenny Prices is the weighted average of the percentage of shares that 
execute at a subpenny price (a dollar execution price with a non-zero value in the third or fourth decimal place). 
WH Pct Shares Executed at Subpenny without Midpoint Trades is the weighted average of the percentage of 
shares that execute at a subpenny price (a dollar execution price with a non-zero value in the third or fourth 
decimal place), excluding executions with subpenny prices that occur at the NBBO midpoint. WH Pct Shares 
Executed at Subpenny Prices with 4 Decimals is the weighted average of the percentage of shares that execute at 
a subpenny price where there is a dollar execution price with a non-zero value in the fourth decimal place. 
Average transaction prices used in calculating the metrics are calculated as the total dollar trading volume divided 
by the total share trading volume in the category and time period. 

227 
 
For the wholesaler (WH) CAT metrics used in the sample, the analysis includes marketable orders for under 
$200,000 in value that originate from a customer with a CAT account type of “individual” at one of the 58 retail 
broker MPIDs and are routed to a wholesaler (see supra note 441 for more info on CAT account types and retail 
broker identification methodology and supra note 442 for more details on how the CAT retail analysis sample 
was constructed). Fractional share orders with share quantity less than one share were excluded from the analysis. 
Orders were also excluded if they had certain special handling codes. The marketability of a limit order is 
determined based on the consolidated market data feed NBBO at the time a wholesaler first receives the order.  
For the exchange (EX) CAT metrics, executed market and marketable limit orders received by exchanges during 
normal market hours over the same period were used to calculate the exchange execution quality statics (see 
supra note 443 for more details on how the CAT exchange sample was constructed). Exchange orders were 
filtered if they had certain special handling codes. The marketability of exchange orders was determined based on 
the NBBO observed by the exchange at the time of order receipt.  
The dollar value of an order was determined by multiplying the order’s number of shares by either its limit price, 
in the case of a limit order, or by the far-side quote of the NBBO at the time of order receipt, in the case of a 
market order. The analysis includes NMS Common Stocks and ETFs (identified by security type codes of ‘A’ and 
‘ETF’ in NYSE TAQ data) that are also present in CRSP data from CRSP 1925 US Stock Database, Ctr. Rsch. 
Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. 
Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not have to 
be in the CRSP 1925 US Indices Database to be included in the analysis. Time of order receipt is defined as the 
time the wholesaler or exchange first receives the order. Wholesaler metrics based on the time of order receipt are 
measured against the NBBO from the consolidated market data feed. Exchange metrics based on time of order 
receipt are measured against the NBBO the exchange reports observing. Realized spreads for both exchange and 
wholesaler metrics are calculated with respect to the NBBO midpoint from the consolidated market data feed 
observed one minute after the time of order execution.  
Separately, for both the exchange and wholesaler samples, total share volume, total dollar volume, average 
transaction price, percentage volume metrics, and share weighted average dollar per share spread, price impact, 
and price improvement metrics were calculated at a stock-week-order size category level by aggregating together 
execution quality statistics calculated for individual orders. The order-size categories were defined as orders less 
than 100 shares, 100-499 shares, 500-1,999 shares, 2,000-4,999, 5,000-9,999 shares, and 10,000+ shares. For 
each stock-week-order size category, percentage spread, price impact, and price improvement metrics were 
calculated by dividing the average dollar per share metric by the average transaction price calculated for each 
stock-week-order size category.  E/Q ratios were calculated for each stock-week-order size category by dividing 
the average dollar per share effective spread by the average dollar per share quoted spread. 
Exchange sample metrics for E/Q ratios and percentage spread, price impact, and price improvement metrics for 
each stock-week-order size category were then merged with the corresponding stock-week-order size category in 
the wholesaler sample. Weighted averages for both wholesaler and exchange metrics and the wholesaler 
percentage volume metrics are then calculated for the security type in the sample by averaging across stock-week-
order size category levels based on their total dollar transaction volume during the sample period in the 
wholesaler CAT sample (i.e., for both exchanges and wholesalers, using the stock’s total dollar trading volume in 
wholesaler executed transactions as the weight when averaging the share weighted average stock-week- size 
category values). Weighting the exchange and wholesaler execution metrics by the same weights helps to ensure 
the samples are comparable across stocks. Total dollar volume and share volume for the exchange and wholesaler 
samples are calculated by summing across all executions in a security type in each sample. The wholesaler 
Principal Execution Rate is calculated for a security type in the wholesaler sample by summing the total dollar 
volume in trades wholesalers executed in a principal capacity across the security type in the wholesaler sample 
and dividing by the total dollar volume in trades in the security type in the wholesaler sample.  
 
In sum, analyses from Table 6 and Table 7 show that wholesaler realized spreads exceed 
exchange realized spreads for comparable marketable order transactions (e.g., similar stocks and 

228 
 
order sizes) on exchanges. If orders internalized by wholesalers were subject to competition from 
multiple liquidity suppliers at the individual order level,
448
 we would expect realized spreads to 
be similar to the realized spreads earned by liquidity providers of similar orders routed to 
exchanges.
449
 That is, the wholesaler could respond to the lower price impact (adverse selection 
risk) of its internalized orders by providing large enough price improvement so that its realized 
spread (potential profits) matched exchange realized spreads generated by the larger price impact 
(adverse selection risk) and smaller price improvement of orders executed by liquidity suppliers 
on exchanges. Since wholesaler price improvement is not commensurate their lower costs (i.e., 
smaller price impacts due to lower adverse selection risk), their realized spreads exceed 
exchange realized spreads. 
 Further evidence and granularity regarding the difference between wholesaler and 
exchange realized spreads are found in Table 8 and Table 9. Table 8 compares the execution 
quality between orders routed to wholesalers and exchanges and provides estimates of effective 
and realized spreads as well as price impacts and E/Q ratios for NMS common stocks and ETFs 
sorted into buckets based on their average dollar quoted spread. Realized spreads are also 
adjusted for per-share PFOF payments made by wholesalers and rebates paid by exchanges in 
order to account for the impact of these costs on potential economic profits. Differences in 
realized spreads between exchanges and wholesalers appear to be largest in stocks with quoted 
                                                
448
  The analysis in Table 7 shows that 9.6% of executed dollar volume from orders routed to wholesalers may 
be effectively rerouted and potentially subject to competition at the individual order level. 
449
  Despite receiving more price improvement, the analyses in supra Table 5, Table 6, and Table 7 show that 
individual investor orders sent to wholesalers still had significantly positive realized spreads, indicating 
their price improvement does not fully offset the lower adverse selection costs they pose. Thus, while the 
higher price impact of orders executed on exchanges compresses exchange realized spreads, one might 
expect (under competitive conditions) that the lower price impact of orders internalized by wholesalers 
would pressure wholesalers to provide sufficiently high price improvement such that wholesaler realized 
spreads would face a similar compression.  

229 
 
spreads less than 1.1 cents or stocks with quoted spreads greater than 5 cents (the buckets in 
which wholesalers earn the largest realized spreads). This appears to be partially driven by orders 
routed to wholesalers receiving the least price improvement (as measured by the E/Q ratio) in 
stocks with quoted spreads less than 1.1 cents and orders routed to exchanges receiving the most 
price improvement in stocks with quoted spreads greater than 5 cents.
450
  
                                                
450
  Results also indicate that, after adjusting for exchange rebates, average exchange realized spreads are 
positive for stocks with average quoted spreads less than 1.1 cents, unlike stocks where average quoted 
spreads exceed 1.1 cents, which still have negative average realized spreads after adjusting for exchange 
rebates. It is possible that one-cent minimum tick size on exchanges limits competition in stocks with 
quoted spreads less than 1.1 cents, leading to higher realized spreads for these stocks. Furthermore, PFOF-
adjusted realized spreads are negative for stocks with quoted spreads less than 1.1 cents, unlike the realized 
spreads for stocks with wider quoted spreads, indicating that potential marginal economic profit is larger 
for these stocks. 

230 
 
Table 8: Estimates of Wholesaler and Exchange Execution Quality for Marketable Orders under $200,000 by 
Quoted Spread Range 
 Quoted Spread Bucket 
Variable < 1.1 cents 1.1 - 2 cents 
2 - 3 
cents 
3 - 5 cent 5+ cents 
WH Effective Spread (bps) 2.74 1.09 1.30 2.00 2.74 
EX Effective Spread (bps) 3.83 1.48 1.84 2.70 4.54 
WH E/Q Ratio 0.48 0.41 0.34 0.34 0.35 
EX E/Q Ratio 1.05 1.20 1.10 1.04 0.92 
WH Price Impact (bps) 1.76 0.73 0.93 1.30 1.43 
EX Price Impact (bps) 6.11 2.26 2.47 3.56 5.73 
WH Realized Spread (bps) 0.99 0.36 0.37 0.69 1.31 
EX Realized Spread (bps) -2.28 -0.78 -0.63 -0.85 -1.20 
WH Realized Spread Adj PFOF (bps) -0.15 0.12 0.17 0.50 1.22 
EX Realized Spread Adj Rebate (bps) 0.18 -0.21 -0.16 -0.38 -0.98 
This table uses the CAT retail analysis data and CAT exchange analysis data to estimate exchange and wholesaler 
effective spreads, price impacts, realized spreads, E/Q ratios and wholesaler and exchange realized spreads after 
accounting for exchange rebates and PFOF across all NMS stocks and ETFs for marketable orders under $200,000 
based on the stock’s average quoted spread. See supra Table 7 for additional details on how the sample and metrics 
are calculated. Stocks are grouped into buckets based off of their time weighted average quoted spread for a week as 
measured in NYSE TAQ. Share-weighted percentage metrics are averaged together at the individual stock-week-
order size category level for the exchange and wholesaler sample using the methodology in Table 7. Weighted 
averages for both wholesaler and exchange metrics are then calculated for each quoted spread bucket by averaging 
across stock-week-order size category levels based on their total dollar transaction volume during the sample period 
in the wholesaler CAT sample (i.e., for both exchanges and wholesalers, using the stock’s total dollar trading volume 
in wholesaler executed transactions as the weight when averaging the share weighted average stock-week-order size 
category values). Weighting the exchange and wholesaler execution metrics by the same weights helps to ensure the 
samples are comparable across stocks. 
Table 9 compares execution quality between wholesalers and exchanges and provides 
estimates of the effective and realized spreads as well as price impacts and E/Q ratios for stocks 
sorted into buckets based on their security type and then sub-sorted into buckets based on their 
price and, for Non-S&P 500 stocks and ETFs, into liquidity buckets based on their total share 
trading volume in a week. Once again, realized spreads are adjusted for (per-share) PFOF 
payments made by wholesalers and rebates paid by exchanges in order to account for their 
impact on potential economic profits. The results show that differences in realized spreads are 
larger in stocks with lower liquidity. This suggests that the isolation of individual investor orders 
due to wholesaler internalizations may result in larger losses in potential price improvement for 
individual investors on their orders in less liquid stocks. 

231 
 
Table 9: Estimates of Execution Quality for Marketable Orders under $200,000 by Stock Type, Price Group, and 
Liquidity Bucket 
Stock Type Price Group 
Liquidity 
Bucket 
WH 
Effectiv
e Spread 
(bps) 
EX 
Effectiv
e Spread 
(bps) 
WH E/Q 
Ratio 
EX E/Q 
Ratio 
WH 
Realized 
Spread 
(bps) 
EX 
Realized 
Spread 
(bps) 
WH 
Realized 
Spread Adj 
PFOF (bps) 
EX 
Realized 
Spread Adj 
Rebate 
(bps) 
S&P 500 1) <$30   
1.18 2.47 
0.45 1.01 
0.67 -1.39 -0.14 -0.22 
S&P 500 2) $30-$100 
 
0.49 1.32 
0.30 1.06 
0.12 -0.62 -0.08 -0.18 
S&P 500 3) $100+   
0.67 1.50 
0.31 1.00 
0.46 -0.15 0.39 -0.03 
Non-S&P 500 1) <$30 Low 
56.26 53.61 
0.72 0.94 
28.98 -0.43 27.66 3.52 
Non-S&P 500 1) <$30 Medium 
31.70 26.91 
0.80 0.96 
11.70 -8.69 9.91 -3.77 
Non-S&P 500 1) <$30 High 
8.84 10.25 
0.65 1.02 
2.21 -6.61 0.12 -1.85 
Non-S&P 500 2) $30-$100 Low 
22.91 23.60 
0.54 0.92 
11.83 0.12 11.71 0.57 
Non-S&P 500 2) $30-$100 Medium 
7.81 10.03 
0.44 0.95 
4.31 -1.03 4.19 -0.59 
Non-S&P 500 2) $30-$100 High 
2.64 4.89 
0.38 0.97 
0.76 -2.48 0.58 -1.99 
Non-S&P 500 3) $100+ Low 
14.86 17.82 
0.42 0.88 
11.83 2.41 11.81 2.51 
Non-S&P 500 3) $100+ Medium 
6.79 10.07 
0.36 0.90 
5.12 0.35 5.08 0.48 
Non-S&P 500 3) $100+ High 
2.43 5.33 
0.30 0.90 
1.47 -0.56 1.41 -0.41 
ETF 1) <$30 Low 
14.98 19.86 
0.67 0.97 
12.76 8.61 12.49 9.68 
ETF 1) <$30 Medium 
11.69 15.23 
0.62 0.96 
9.52 4.89 9.29 5.96 
ETF 1) <$30 High 
2.79 4.31 
0.55 1.04 
1.36 -1.39 0.62 0.20 
ETF 2) $30-$100 Low 
8.06 10.62 
0.59 0.94 
6.98 4.62 6.88 5.10 
ETF 2) $30-$100 Medium 
4.22 6.70 
0.42 0.93 
3.83 1.81 3.75 2.25 
ETF 2) $30-$100 High 
0.66 1.43 
0.40 1.12 
0.51 -0.41 0.36 0.05 
ETF 3) $100+ Low 
2.54 4.69 
0.39 0.92 
2.39 1.05 2.36 1.20 
ETF 3) $100+ Medium 
1.21 2.34 
0.33 0.98 
1.17 0.02 1.15 0.16 
ETF 3) $100+ High 
0.20 0.44 
0.39 1.27 
0.15 -0.10 0.12 -0.02 
This table uses the CAT retail analysis data and CAT exchange analysis data to estimate exchange and wholesaler effective 
spreads, realized spreads, E/Q ratios and wholesaler and exchange realized spreads after accounting for exchange rebates and 
PFOF across all NMS stocks and ETFs for marketable orders under $200,000 based on the stock’s type, VWAP, and traded 
share volume. See supra Table 7 for additional details on how the sample and metrics are calculated. Stocks are broken out 
into buckets based on their security type, price, and liquidity. Stock type is based on whether a security is an ETF, or a 
common stock in the S&P 500 or Non-S&P 500. Price buckets are based on a stock’s average VWAP price over a week as 
estimated from TAQ (see supra Table 7 for additional details). Stocks within each security type-price bucket, except S&P 
500 stocks, are sorted into three equal liquidity buckets based on the stock’s total share trading volume during the week 
estimated using TAQ data. Share-weighted percentage metrics are averaged together at the individual stock-week-order-size 
category level for the exchange and wholesaler sample using the methodology in Table 7. Weighted averages for both 
wholesaler and exchange metrics are then calculated for each security-type-price-liquidity bucket by averaging across stock-
week-order size category levels based on their total dollar transaction volume during the sample period in the wholesaler 
CAT sample (i.e., for both exchanges and wholesalers, using the stock’s total dollar trading volume in wholesaler executed 
transactions as the weight when averaging the share weighted average stock-week-order size category values). Weighting the 
exchange and wholesaler execution metrics by the same weights helps to ensure the samples are comparable across stocks. 
 
The previous section provided evidence that wholesalers earn greater realized spreads 
relative to exchanges and these differences are larger in less liquid stocks. In the following 

232 
 
section, we present additional evidence on the variation in execution quality that wholesalers 
provide to individual investor orders. 
 
Table 10 uses CAT retail analysis to summarize how individual investor marketable 
NMS stock order execution quality varies based on whether the wholesaler executes the order in 
a principal capacity (i.e., internalizes the order) or effectively reroutes the order (i.e., executes in 
a riskless principal or handles it in an agency capacity). This analysis supports the interpretation 
that wholesalers identify and tend to internally execute individual investor orders associated with 
the lower adverse selection costs.
451
 Internalized orders have a lower price impact (0.91 bps as 
compared to 4.63 bps for those effectively rerouted), and lower effective spreads (1.77 compared 
to 5.36 for other transactions). Wholesalers also earn higher realized spreads on the orders they 
execute as principal (0.86 bps for principal transactions compared to 0.72 bps earned by those 
providing liquidity for the riskless principal or agency transactions), despite executing them at 
lower effective spreads. 
 
                                                
451
  Certain items in Table 10 may also be affected by MDI Rules once they are implemented. See supra notes 
356 and 421. 

233 
 
Table 10: Wholesaler CAT Analysis of Individual Investor Order Execution Quality by Wholesaler Execution 
Capacity 
Variable Internalized Effectively Rerouted 
Average Price $33.48 $14.78 
WH Orders (million) 236.95 34.36 
WH Trades (millions) 251.32 74.36 
WH Share Volume (billion shares) 70.28 16.83 
WH Pct of Executed Share Volume 80.68% 19.32% 
WH Dollar Volume (billion $) $2,352.80 $248.64 
WH Pct of Executed Dollar Volume 90.44% 9.56% 
WH Effective Spread (bps) 1.77 5.36 
WH Realized Spread (bps) 0.86 0.72 
WH Price Impact (bps) 0.91 4.63 
WH E/Q Ratio 0.35 0.70 
WH Pct Executed with Price Improvement 93.37% 57.65% 
WH Conditional Amount Price Improvement (bps) 2.45 3.74 
WH Pct Shares Executed at Midpoint or Better 46.05% 30.65% 
WH Pct Shares Executed at Midpoint 32.23% 26.53% 
WH Pct Shares Executed at NBBO 5.51% 35.49% 
WH Pct Shares Executed Outside NBBO 1.12% 6.86% 
WH Pct Shares Executed with <0.1 cent Price Improvement 20.38% 2.22% 
The table summarizes execution quality statistics from the CAT retail analysis based on whether the wholesaler 
executed the individual investor NMS stock order in a principal capacity or in another capacity (i.e., in an agency or 
riskless principal capacity). The majority of the other transactions are executed by the wholesaler in a riskless principal 
capacity. See supra Table 7 for additional details on the sample and metrics used in the analysis. Share-weighted 
percentage metrics are averaged together at the individual execution capacity-stock-week-order-size category level for 
the wholesaler sample using the methodology in Table 7. Weighted averages for the metrics are then calculated for 
each execution capacity by averaging across execution capacity-stock-week-order size category levels based on their 
total dollar transaction volume during the sample period in the wholesaler CAT sample. 
Table 11 provides data on the duration of time to execution for orders routed to 
wholesalers. While there is substantial variation in time to execution for both internalized orders 
and orders routed to other market centers, internalized order are executed more quickly, 
especially for orders with the slowest execution times (i.e., greater than or equal to the 75th 
percentile). The median execution time for rerouted orders was 24 milliseconds (0.024 seconds), 
about seven times longer than the median execution time for internalized orders, which equaled 
3.6 milliseconds (i.e., 0.0036 seconds). The execution time for the slowest 5% of internalized 

234 
 
orders was under 1.3 seconds, substantially faster than the slowest 5% of rerouted orders, which 
took around two minutes to execute. 
Table 11: Distribution of Share-Weighted Time-to-Execution (in milliseconds). 
Execution Capacity 5th Pctl 10th Pctl 25th Pctl 50th Pctl 75th Pctl 90th Pctl 95th Pctl 
Internalized 0.47 0.90 1.56 3.56 8.65 80.69 1,269.03 
Effectively Rerouted 2.00 4.55 10.38 24.36 2,983.30 35,166.76 119,284.18 
This table presents the time-to-execution of orders handled by wholesalers that are either internalized or effectively 
rerouted. Time-to-execution statistics are share weighed across observations. See supra Table 7 for additional details 
on the sample. 
 
While individual investor NMS stock orders are generally viewed as possessing less 
adverse selection risk than orders of other investors, there is nevertheless variation in adverse 
selection risk across this order flow.
452
 Table 12 shows the distribution of the average percentage 
price impact across 58 retail broker MPIDs in the CAT retail analysis in NMS Common Stocks 
and ETFs.
453
 The results indicate there is substantial variation in price impact across the order 
flow from different retail brokers, with the price impact of the 90th percentile retail broker’s 
orders being approximately 20 times greater than that of the 10th percentile retail broker’s orders 
and more than 4 times greater than the median retail brokers orders. 
                                                
452
  Certain retail brokers tend to have more sophisticated customers than other retail brokers. Order flow from 
these retail brokers carries greater adverse selection risk, while order flow from retail brokers with 
generally less sophisticated customers carries less adverse selection risk. For the purposes of this release, 
the Commission discusses retail brokers as carrying different levels of adverse selection risk, although this 
is actually a description of the order flow of the customer base of these retail brokers, not the actual retail 
brokers. 
453
  Certain items in Table 12 may also be affected by the amendments in the MDI Adopting Release once they 
are implemented. See supra notes 356 and 421. 

235 
 
Table 12: Distribution of Individual Retail Broker-Dealer Average Percentage Price Impact (bps) in quality in NMS 
Common Stocks and ETFs during Q1 2022 
N Mean Std Dev Min 10th Pctl 25th Pctl 50th Pctl 75th Pctl 90th Pctl Max 
58 1.07 2.35 -12.34 0.16 0.43 0.83 1.39 3.38 7.00 
This table summarizes the distribution of the retail broker MPID’s average price impact for the 58 retail broker MPIDs in 
the CAT retail analysis in NMS Common Stocks and ETFs. Each Retail Broker MPID’s price impact is determined by 
share weighting their average percentage price impact half spread within an individual NMS common stock or ETF and 
then averaging across stocks using the weighting of the dollar volume the retail broker MPID executed in each security 
(Dollar Volume weighted). See supra Table 7 for additional details on the sample and metrics used in the analysis. NMS 
Common stocks and ETFs are identified, respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’. 
Analysis suggests that wholesalers tend to provide lower execution quality to retail 
brokers that have higher adverse selection costs (i.e., price impact). Table 13 sorts the 58 retail 
broker MPIDs in the CAT retail analysis in NMS Common Stocks and ETFs into quintiles based 
on their price impact.
454
 The results indicate that the orders of retail brokers in the higher adverse 
selection quintiles handled by wholesalers receive worse execution quality, as measured by 
higher effective spreads and E/Q ratios, than the orders of retail brokers in the lower adverse 
selection quintiles.
455
 More specifically, the E/Q ratio of the broker-dealers with the highest price 
impact (quintile 5) is more than twice as large as the E/Q ratio of the broker-dealers with the 
lowest price impact (quintile 1). 
                                                
454
  Certain items in Table 13 may also be affected MDI Rules once they are implemented. See supra notes 356 
and 421. 
455
  Several recent working papers also found that price improvement varies across retail brokers; see 
Christopher Schwarz et al., The ‘Actual Retail Price’ of Equity Trades (last revised Sept. 15, 2022) 
(unpublished manuscript), available at https://ssrn.com/abstract=4189239 (retrieved from Elsevier 
database) (“Schwarz et al. (2022)”); and Bradford Lynch, Price Improvement and Payment for Order Flow: 
Evidence from A Randomized Controlled Trial (last revised Oct. 3, 2022) (unpublished manuscript), 
available at https://ssrn.com/abstract=4189658 (retrieved from Elsevier database) (“Lynch (2022)”). These 
studies only included trades that were initiated by the authors, and do not include other trades that were 
handled by the brokers in their samples. In contrast, the Commission’s analysis is based on the data 
reflecting all orders routed by 58 brokers.  

236 
 
Table 13: Execution quality in NMS Common Stocks and ETFs for Retail Brokers sorted into quintiles based on their 
Average Percentage Price Impact (bps) 
BD Average Price 
Impact Quintile 
Avg WH Price 
Impact (bps) 
Avg WH Principal 
Execution Rate 
Avg WH Effective 
Spread (bps) 
Avg WH Realized 
Spread (bps) 
Avg WH E/Q 
Ratio  
1 -1.04 88.62% 2.86 3.90 0.43 
2 0.48 86.63% 1.87 1.39 0.46 
3 0.79 88.65% 2.15 1.36 0.48 
4 1.32 83.86% 3.48 2.17 0.61 
5 3.85 64.01% 7.24 3.39 0.88 
This table summarizes how execution quality varies in NMS Common Stocks and ETFs based on a retail broker MPID’s price 
impact by grouping the 58 retail broker MPIDs in the CAT retail analysis in NMS Common Stocks and ETFs into quintiles 
based on their average price impact. Each Retail Broker MPID’s price impact is determined by share weighting its average 
percentage price impact within an individual NMS common stock or ETF and then averaging across stocks using the 
weighting of the dollar volume the retail broker executed in each security (Dollar Volume weighted). Average price impacts, 
effective spreads, realized spreads, and E/Q ratios are also calculated for each retail broker MPID by share weighting within 
an individual NMS common stock or ETF and then averaging across stocks using the weighting of the dollar volume the retail 
broker MPID executed in each security (Dollar Volume weighted). The E/Q ratio is the share weighted average of the ratio of 
each transaction’s effective spread divided by its quoted spread at the time of order receipt. Retail broker MPIDs are sorted 
into quintiles based on their average percentage price impact (bps) and then averages for each quintile are determined by 
equally weighting the average statistic for each retail broker MPID. See supra Table 7 for additional details on the sample and 
metrics used in the analysis. NMS Common stocks and ETFs are identified, respectively, as securities in TAQ with a Security 
Type Code of ‘A’ and ‘ETF. This analysis uses data from prior to the implementation of the MDI Rules and specific numbers 
may differ following the implementation of the MDI Rules. See infra section VII.B.7. 
 
 
Although wholesalers provide individual investor orders with price improvement relative 
to exchanges, the magnitude of this price improvement is not uniform across retail brokers. The 
previous section provided evidence of variation in execution quality based on adverse selection 
risk. There is also evidence that execution quality varies based on whether the retail broker 
receives PFOF for NMS stock orders. Commission analysis in this section shows that the PFOF a 
wholesaler pays to a retail broker affects the price improvement wholesalers provide, and 

237 
 
wholesalers provide worse execution quality to broker-dealers whose customers’ orders pose a 
greater adverse selection risk.
 456
 
Commission analysis presented in Table 14 compares average execution quality for 
PFOF and non-PFOF brokers for marketable orders of individual investors under $200,000 in 
NMS Common stocks and ETF orders that are routed to wholesalers.
457
 Results are divided 
between orders that were executed on a principal basis (i.e., internalized) and those executed via 
other methods (the majority of which are in a riskless principal capacity). 
                                                
456
  Schwarz et. al. (2022) do not find a relationship between the amount of PFOF a retail broker receives and 
the amount of price improvement their customers’ orders receive. However, they noted that the variation in 
the magnitude of price improvement they saw across retail brokers was significantly greater than the 
amount of PFOF the retail broker received, which could indicate their sample was not large enough to 
observe a statistically significant effect. Similarly, the difference we observe between the effective spreads 
of PFOF and non-PFOF brokers infra Table 14 is significantly smaller than the differences observed across 
broker-dealers in supra Table 13. Lynch (2022) reports a broker deriving high PFOF revenues provides 
small price improvements to customer orders, while a broker deriving low PFOF revenue offers large price 
improvement. Importantly, both studies only included trades that were initiated by the authors and do not 
include other trades that were handled by the brokers in their samples, preventing them from examining the 
attributes of a typical retail order handled by each broker. As such, these studies would not observe the 
variation in price improvements that reflect differences in the adverse selection risk associated with the 
order flow of different brokers, and hence, would likely conflate the impacts of PFOF with that of adverse 
selection risk. That is, these studies cannot control for the possibility that a wholesaler would offer smaller 
price improvement to order flows with higher adverse selection risk. In contrast, the Commission relies on 
CAT data to examine the adverse selection risk at the broker level, which is a determinant of the amounts 
of price improvements that a given wholesaler would offer to different brokers. The regression framework 
in Table 15 controls for the adverse selection risk of the retail broker and finds that is has a negative 
relationship with the magnitude of price improvement their customers’ orders receive. We also find a 
negative relationship between the amount of PFOF a broker-dealer receives and the magnitude of the price 
improvement their customers’ orders receive after controlling for the retail broker adverse selection risk. 
457
  Some brokers that do not accept PFOF for orders in equities accept PFOF for orders in options. Certain 
items in Table 14 may also be affected by MDI Rules once they are implemented. See supra notes 356 and 
421. 

238 
 
Table 14: Comparison of PFOF and Non-PFOF Broker Execution Quality in NMS Common Stocks and ETFs 
 
Principal Transactions Other Transactions 
 
Non-PFOF PFOF Non-PFOF PFOF 
Average Price $41.79 $31.35 $23.90 $12.47 
WH Share Volume (billion shares) 14.32 55.96 3.40 13.43 
WH Dollar Volume (billion $) $598.44 $1,754.36 $81.23 $167.41 
Pct of Executed Dollar Volume 23.00% 67.44% 3.12% 6.44% 
WH Effective Spread (bps) 1.50 1.86 4.57 5.75 
WH Realized Spread (bps) 0.88 0.85 0.83 0.66 
WH Realized Spread Adj PFOF (bps) 0.88 0.43 0.83 -0.55 
WH Price Impact (bps) 0.62 1.01 3.74 5.07 
WH E/Q Ratio 0.30 0.37 0.78 0.67 
WH Pct Executed with Price Improvement 90.59% 94.32% 46.89% 62.87% 
WH Conditional Amount Price Improvement (bps) 2.75 2.34 2.31 4.30 
The table summarizes execution quality statistics from the CAT retail analysis in Common Stocks and ETFs based on 
whether the retail broker MPID receives PFOF from wholesalers (PFOF) or does not (Non-PFOF) and whether the 
wholesaler executed the individual investor order in a principal capacity or in another capacity (i.e., in an agency or riskless 
principal capacity). A broker-dealer MPID was determined to be a PFOF broker if the broker-dealer reported receiving PFOF 
on its Q1 2022 606 report, or if the report of its clearing broker reported receiving PFOF in the event that the broker did not 
publish a Rule 606 report. Broker-dealers or clearing brokers that handled orders on a not held basis and did not disclose 
PFOF information in their Rule 606 report were classified as PFOF brokers if disclosures on their websites indicated they 
received PFOF. Twenty-two MPIDs belonging to 19 retail brokers were classified as receiving PFOF. The majority of the 
other transactions are executed by the wholesaler in a riskless principal capacity. See supra Table 7 for additional details on 
the sample and metrics used in the analysis. Share-weighted percentage metrics are averaged together at the individual PFOF 
-execution capacity-stock-week-order-size category level for the wholesaler sample using the methodology in Table 7. 
Weighted averages for the metrics are then calculated for each PFOF-execution capacity category by averaging across 
execution capacity-stock-week-order size category levels based on their total dollar transaction volume during the sample 
period in the wholesaler CAT sample. 
 
The results in Table 14 show that wholesaler internalized orders (Principal Transactions) 
originating from PFOF brokers are associated with (1) higher effective spreads, (2) higher E/Q 
ratios, and (3) slightly smaller price improvement on orders that achieved at least some price 
improvement (WH Conditional Amount Price Improvement), relative to wholesaler internalized 
orders originating from non-PFOF brokers. However, the results also show that orders 
internalized from non-PFOF brokers also have lower adverse selection risk and similar realized 
spreads (before PFOF is paid), indicating the lower adverse selection risk could help explain 
differences in the observed execution quality. 

239 
 
Because the results in Table 14 are averages across broker-dealers, they cannot 
disentangle the effects of PFOF on execution quality from differences in the adverse selection 
risk of different broker-dealers.
458
 In order to control for these differences, the Commission 
analyzed the effects of PFOF and differences in broker-dealer adverse selection risk on execution 
quality in a regression framework that controls for other factors that could affect the price 
improvement provided by wholesalers. 
Table 15 displays regression results from Commission CAT retail analysis of NMS 
Common stock and ETF orders.
459
 The regression tests whether there is a statistically significant 
relationship between execution quality and the amount of PFOF a broker-dealer receives and 
includes several individual stock- and market-level controls
460
 as well as the retail broker’s 
average price impact and size (as measured by percent of executed individual investor dollar 
volume). Four different measures of execution quality are used for the dependent variable, 
including E/Q ratio, effective spread, realized spread, and price improvement.
461
 The results in 
                                                
458
  They also cannot disentangle the effects of differences in the stocks traded by PFOF and non-PFOF 
brokers.  
459
  Certain items in this Table 15 may also be affected by the amendments in the MDI Rules once they are 
implemented. See supra notes 356 and 421. 
460
  Broker-dealer cents per 100 shares PFOF rates (dollar PFOF rates) are determined from their Q1 2022 Rule 
606 reports (see supra Table 2) or the Rule 606 reports of its clearing broker reported receiving PFOF in the 
event that the broker did not publish a Rule 606 report. A PFOF rate of 20 cents per 100 shares was used 
for the introducing broker-dealers and clearing broker that reported handled orders on a not held basis and 
did not disclose PFOF information in their Rule 606 report but disclosed on their website that they received 
PFOF for their order flow. 20 cents per 100 shares was the PFOF rate that the clearing broker that handles 
orders on a not held basis disclosed on their website that they received. Twenty-two MPIDs belonging to 
19 retail brokers were classified as receiving PFOF. Dollar PFOF rates for each retail broker were merged 
with the corresponding stock (S&P 500 and non-S&P 500) and order type in the CAT sample. For the 
regressions in Table 15, percentage PFOF rates are estimated in basis points by dividing the PFOF cents 
per 100 share values from Rule 606 reports (after converting them to dollar per share values) by the stock-
week VWAP for the security in the CAT sample. Stock-level controls include average share volume, 
VWAP, return, average effective spread, average realized spread, and average quote volatility during a 
week. Market-level controls include market volatility, market return, and the market’s average daily trading 
volume during week. 
461
  The regression also includes variables to control for differences in execution quality across different 
wholesalers and across different order size categories. The analysis examines trades in Q1 2022 that 

240 
 
Table 15 show that the Table 14 results indicating brokers that receive PFOF receive inferior 
execution quality are robust to the inclusion of controls for differences in the type of order flow 
coming from different broker-dealers. 
Table 15: Regression Analysis showing Relationship Between Execution Quality and PFOF in NMS 
Common Stocks and ETFs 
  (1) (2) (3) (4) 
VARIABLES 
E/Q 
 Ratio 
Effective spread 
(bps) 
Realized spread 
(bps) 
Amount Price 
Improvement 
(bps) 
          
PFOF Rate 
0.0132*** 0.217*** 0.211*** -0.170*** 
 
[2.82] [6.31] [7.13] [-5.52] 
Stock Share Volume 
0.0379 -0.0462 -0.886* -0.533** 
 
[0.51] [-0.14] [-1.65] [-2.53] 
Stock VWAP 
-0.000028 0.000233 -0.000450 0.000014 
 
[-1.06] [0.61] [-0.78] [0.04] 
Stock Return 
-0.000273 -0.0200* -0.0120 0.00840 
 
[-0.21] [-1.93] [-0.36] [0.84] 
VIX 
0.00968*** 0.0122* 0.0607*** -0.000256 
 
[7.29] [1.79] [2.85] [-0.05] 
Market Return 
-0.00710** 0.00787 0.00686 -0.0150 
 
[-2.02] [0.36] [0.15] [-0.96] 
Market Dollar Volume 
0.0306*** 0.0641*** 0.164*** -0.0390*** 
 
[9.70] [3.44] [3.07] [-2.69] 
Stock Avg Effective spread 
0.00700*** 0.122*** -0.0455* 0.00746 
 
[3.34] [6.07] [-1.94] [0.52] 
Stock Avg Realized spread 
-0.00169* -0.00902 0.0730*** -0.00552 
 
[-1.87] [-1.45] [2.98] [-1.48] 
Stock Quote Volatility 
0.457** 2.232 -1.799 4.458** 
 
[2.09] [1.05] [-0.65] [2.03] 
Broker-Dealer Average 
Price Impact 
0.145*** 0.414*** 0.316*** -0.417*** 
 
[14.74] [9.83] [8.50] [-10.21] 
                                                
wholesalers execute in a principal capacity from market and marketable limit orders from individual 
investors that are under $200,000 in value and are in NMS Common stocks and ETFs. See supra Table 7 
for further discussion on the sample. The unit of observation for the regression is the average execution 
quality provided to trades that are aggregated together based on having the same stock, week, order type, 
order size category, wholesaler, and retail broker MPID. The coefficients are estimated by weighting each 
observation by the total dollar volume of trades executed in that observation. 

241 
 
Broker-Dealer Pct Volume 
-2.45e-05 -0.00207* -0.00546*** 0.000124 
 
[-0.07] [-1.76] [-3.77] [0.12] 
Average Trade Qspread 
-0.00720*** 0.517*** 0.378*** 0.392*** 
 
[-10.12] [19.78] [10.84] [21.14] 
     
Wholesaler Fixed Effects Yes Yes Yes Yes 
Order Size Category Fixed 
Effects Yes Yes Yes Yes 
Stock Fixed Effects Yes Yes Yes Yes 
Observations 13,365,122 13,365,122 13,365,122 12,453,440 
Adjusted R-squared 0.279 0.574 0.060 0.594 
This table presents the results of a regression analysis examining the effect of retail brokers receiving PFOF from 
wholesalers on levels of price improvement and the execution quality of their customers’ orders when the 
wholesaler internalizes the order on a principal basis.  
The analysis examines trades in Q1 2022 that wholesalers execute in a principal capacity from market and 
marketable limit orders from individual investors that are under $200,000 in value and are in NMS Common 
stocks and ETFs. See supra Table 7 for further discussion on the CAT retail sample. The unit of observation for 
the regression is the average execution quality provided to trades that are aggregated together based on having the 
same stock, week, order type, order size category, wholesaler, and retail broker MPID. Weighted regression are 
performed based on the total dollar value executed by the wholesaler in that observation (i.e., total shares 
executed for all orders that fit within that stock-week-retail broker-wholesaler-order type-order size category). 
This means that the regression coefficients capture the effect on execution quality on a per-dollar basis.  
Dependent variables include: the average E/Q ratio of the shares traded; the average percentage effective spread 
of the shares traded measured in basis points; the average percentage realized spread of the shares traded 
measured in basis points; and the average percentage value of the amount of price improvement measured in 
basis points, conditional on the order being price improved. These variables are from the CAT retail analysis and 
described in supra Table 7.   
Explanatory variables include: PFOF Rate is the retail brokers’ PFOF rates in bps (the per share rates were 
determined from retail broker Rule 606 reports and divided by the VWAP of the executed shares in the sample to 
determine the PFOF rate on a percentage basis, see supra note 460); Broker-Dealer Pct Volume is the retail 
broker size (in terms of percentage total executed dollar trading volume in the sample); Stock Share Volume is 
the stock’s total traded share volume during the week (from TAQ in billions of shares); Stock VWAP is the 
VWAP of stock trades during the week (from TAQ); Stock Return is the stock’s return during the week (from 
CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); VIX is the average 
value of the VIX index during the week (from CBOE VIX data); Market Return is the average CRSP value 
weighted market return during the week, Market Dollar Volume is the total market dollar trading volume during 
the week (from CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); Stock 
Avg Effective spread is the stock’s share weighted average percent effective half spread during the week 
measured in basis points (from TAQ); Stock Avg Realized spread is the stock’s share weighted average percent 
realized half spread during the week measured in basis points (from TAQ); Stock Quote Volatility is the stock’s 
average 1 second quote midpoint volatility measured in basis points (from TAQ); Broker-Dealer Average Price 
Impact is the retail broker’s average price impact over the sample measured in basis points (see supra Table 12 
for more details on how the metric is calculated); Average Trade Qspread is the average percentage quoted half 
spread at the time of order submission for orders in that stock-week-retail broker-wholesaler-order type-order size 
category measured in basis points; wholesaler fixed effects (i.e., indicator variables for each wholesaler that 
control for time-invariant execution quality differences related to each wholesaler); order-size category fixed 
effects (i.e., indicator variables for each order-size category that control for time-invariant execution quality 
differences related to order-size category); and individual stock fixed effects (i.e., indicator variables for each 
stock that control for time-invariant execution quality differences related to individual stocks). The order size 
categories include less than 100 shares, 100-499 shares, 500-1,999 shares, 2,000-4,999, 5,000-9,999 shares, and 
10,000+ shares. Brackets include t-statistics for the coefficients based on robust standard errors that are clustered 

242 
 
at the stock level. ***, **, and * indicate the t-statistics for the coefficients are statistically significant at the 0.01, 
0.05, and 0.1 levels, respectively.  
This analysis uses data from prior to the implementation of the MDI Rules and specific numbers may be different 
following the implementation of the MDI Rules. See supra note 356 and section VII.B.7. 
Regression results in Table 15 support the conclusion that wholesalers provide worse 
execution quality to brokers that receive more PFOF.
462
 The coefficients on the PFOF Rate 
variable indicates that, all else equal, for the orders wholesalers internalize, execution quality 
declines as the amount of PFOF paid to the retail broker increases. Orders from retail brokers 
that receive a greater amount of PFOF have higher E/Q ratios and effective spreads and receive 
less price improvement. The regression results (as measured by the coefficient on the PFOF Rate 
variable) indicate that, all else equal, wholesalers earn higher realized spreads on orders for 
which they pay more PFOF. Note that PFOF is not taken out of the realized spread measure, so 
the realized spread proxies for wholesaler’s economic profits before any fees are taken out. 
Regression results in Table 15 also show that the retail broker’s adverse selection risk (as 
measured by the coefficient on the Broker-Dealer Average Price Impact variable) has a 
statistically significant effect on the execution quality wholesalers give on trades they internalize. 
The positive coefficient indicates that wholesalers provide worse execution quality to broker-
dealers whose customers’ orders pose a greater adverse selection risk.  
In sum, Commission analysis indicates that wholesalers deliver execution quality that 
varies across broker-dealers based on their adverse selection risk. Wholesalers also deliver 
execution quality that varies based on characteristics of the order (lot size, principal capacity vs. 
riskless principal or agency capacity, market vs. marketable limit, S&P 500 vs. non-S&P 500). 
                                                
462
  While results from the regression analysis indicate that orders routed by PFOF-brokers receive reduced 
execution quality from wholesalers, there could be ways that PFOF is indirectly passed on to customers by 
their retail brokers. However, the Commission lacks evidence on the extent to which this is occurring. 
 

243 
 
The business model of wholesalers relies on their ability to parse the adverse selection risk of 
individual investors’ orders based on these numerous characteristics and to deliver some price 
improvement while still generating the potential for high profits for themselves in the form of a 
high realized spread. The lack of additional price improvement that could otherwise be provided 
to individual investors stems from the isolation of marketable orders by wholesalers, which 
results in a lack of order-by-order competition.  
 
Wholesalers do not charge retail brokers for the routing and execution that they provide, 
and pay a segment of these brokers PFOF for the right to handle their order flow. Proposed Rule 
615 could therefore impact retail brokers as well as wholesalers, due to their interdependence. In 
order to analyze the economic effects of the Proposal on retail brokers, we first provide relevant 
detail of the retail broker industry. 
There are approximately 2,440 retail brokers in the U.S., earning quarterly revenues of 
approximately $86.7 billion and handling 228.9 million customer accounts.
463
 Retail brokers 
provide a range of services that assist their customers in the purchase of securities, which include 
stocks, bonds, mutual funds, ETFs, options, futures, foreign exchange, and crypto asset 
securities. Proposed Rule 615, however, would cover only NMS stocks, and many customer 
accounts include assets that include or exclusively contain securities that are not NMS stocks. 
The Commission does not know what share of these accounts contain exclusively NMS stocks, 
but estimates that approximately 1,000 retail brokers originated NMS stock orders from 
individual investors in 2021.
464
 
                                                
463
  Data are from Q2 2022, FOCUS Part II Schedule SSOI. 
464
  This number is estimated using CAT data for broker-dealers that originated an order from an “Individual 
Customer” CAT account type in 2021. This larger sample is refined down to a sample of 54 broker-dealers 

244 
 
Retail broker services are sometimes divided into two generally defined categories: 
“discount brokers” and “full-service” brokers. Discount brokers typically provide commission-
free trading for online purchases of stocks and ETFs, but often charge fees for purchases of other 
securities. Some discount brokers manage proprietary mutual funds and ETFs, which earn them 
revenue (based on the funds’ “expense ratio”) paid by the investors that purchase these funds. 
Full-service brokers (as they are commonly called and as used in this release) typically charge 
commissions and advisory fees, frequently as a share of the client's total assets under 
management, in exchange for more detailed financial guidance. 
Retail brokers distinguish themselves by the range of securities that they sell, as well 
accessibility and functionality of their trading platform, which can be geared towards less 
experienced or more sophisticated investors. Discount brokers can also differentiate themselves 
by providing more extensive customer service as well as tools for research and education on 
financial markets.  
 
Most marketable orders of individual investors are routed by retail brokers to 
wholesalers. Wholesalers do not directly charge retail brokers for their order routing and 
execution and pay PFOF to some of these retail brokers in exchange for this order flow. 
Wholesalers paid $235 million in PFOF in NMS stocks in Q1 2022.
465
 
Table 16 below indicates that a single firm received more than 43% of all PFOF 
stemming from NMS stock orders during Q1 2022. Furthermore, the number one and number 
                                                
fort the CAT data analysis presented above, beginning in supra Table 7. See supra note 441 for a 
description of how the sample of 54 brokers was chosen.  
465
  In NMS stocks in Q1 2022, wholesalers paid $94 million in PFOF for market orders, $53 million for 
marketable limit orders, $69 million for non-marketable limit orders, and $19 million for other order types.  

245 
 
four firms on this list merged in 2020, implying that a single firm received slightly more than 
55% of all PFOF stemming from NMS stock orders. Along with this firm, the other three firms 
at the top of this list collectively received almost 94% of all PFOF from NMS stocks. 
Table 16: Top Broker-Dealer Recipients of PFOF from NMS stocks and Total Revenue 
 PFOF  
Received 
(Q1 2022-) 
Total Firm 
Revenue 
(Q1 2022-) 
PFOF  
Share of  
Revenue 
Share of  
Total PFOF  
Disbursed 
 
   
 
BD1 
$101,509,456 $1,766,885,957 5.7% 
43.12% 
BD2 
$35,019,397 $403,037,037 8.7% 
14.88% 
BD3 
$32,611,006 $435,731,084 7.5% 
13.85% 
BD4 
$28,919,376 $1,876,198,891 1.5% 
12.28% 
BD5 
$22,816,637 $94,176,227 24.2% 
9.69% 
BD6 
$7,810,943 $50,207,346 15.6% 
3.32% 
BD7 
$4,123,125 $64,850,454 6.4% 
1.75% 
BD8 
$835,652 $10,855,447 7.7% 
0.35% 
BD9 
$696,482 $9,406,401 7.4% 
0.30% 
BD10 
$590,124 $12,341,917 4.8% 
0.25% 
BD11 
$268,754 $499,731 53.8% 
0.11% 
BD12 
$145,943 $38,249,831 0.4% 
0.06% 
BD13 
$68,552 $19,462,153 0.4% 
0.03% 
BD14 
$4,122 $4,977,874 0.1% 
0.002% 
 
   
 
This table includes data from Rule 606 reports and lists all PFOF payments stemming from NMS stock orders 
paid by wholesalers to broker-dealers. The Commission analyzed Rule 606 reports for the most active 50 broker-
dealers, and the summary payments to the fourteen firms in the table above represent all PFOF payments made by 
wholesalers for NMS stock orders during Q1 2022. The table also contains the total revenue earned by these 
firms during the same period. The PFOF share of revenue is calculated by dividing PFOF by revenue for each 
broker-dealer. 
Table 16 also reveals that dependence on PFOF as a source of revenue is not equally 
shared among these firms. The average PFOF share of revenue of these firms is 9.6%. However, 
setting aside the disproportionately high PFOF revenue share of 53.8% from the smallest firm 
(by revenue) on this list, the average share of revenue stemming from PFOF falls to 6.5%. This is 
almost identical to the median PFOF revenue share of 6.4%. 

246 
 
Besides receiving different overall disbursements of PFOF revenue, broker-dealers 
receive different PFOF rates. Table 17 below displays the distribution of PFOF rates (in cents per 
100 shares) paid by wholesalers to retail brokers. 
Table 17: Distribution across PFOF Brokers of Average Rule 606 Payment Rates from Wholesalers for Q1 2022 (cents 
per 100 shares) 
 
Distribution 
statistic Market Orders 
Marketable 
Limit Orders 
Non-
Marketable 
Limit Orders Other Orders 
S&P 500 
Average 
40.3 37.8 49.7 43.1 
Min 
7.0 6.5 6.1 4.8 
25th Pct 
14.4 14.4 15.0 11.5 
Median 
15.0 16.0 28.6 16.6 
75th Pct 
22.0 22.4 32.4 22.2 
Max 
280.7 247.6 338.0 310.8 
Non S&P 
500 
Average 
14.7 11.9 18.5 11.6 
Min 
6.2 3.3 4.6 2.1 
25th Pct 
11.1 9.4 13.2 8.2 
Median 
13.7 10.9 18.2 9.9 
75th Pct 
18.8 14.4 25.1 17.0 
Max 
22.7 20.9 28.9 18.6 
Combined 
Average 
16.2 12.7 20.1 13.2 
Min 
6.3 3.4 4.6 2.5 
25th Pct 
11.3 9.9 13.6 8.3 
Median 
13.8 12.1 21.9 10.4 
75th Pct 
21.5 15.7 28.3 19.1 
Max 
36.4 21.0 31.0 27.2 
This table displays the distribution across retail brokers (that received PFOF from wholesalers) of average PFOF payment rates 
from wholesalers for Q1 2022 (cents per 100 shares). The data were obtained by analyzing rule 606 Reports from the 14 BDs 
that accepted PFOF from wholesalers. The table shows the distribution of PFOF rates broken down by S&P 500 and non-S&P 
500 stocks, across market orders, marketable limit orders, non-marketable limit orders, and other orders that retail brokers route 
to different types of venues in Q1 2022. See supra Table 2 for additional details on the sample. 
PFOF rates vary along several dimensions. For marketable orders, including market and 
marketable limit orders, the combined median rate in Table 17 is 12-14 mils, significantly less 
than the median rate for the non-marketable orders median rate of 22 mils. In addition, variation 
is wider in non-marketable limit orders, with a wider range between the 25
th
 and 75
th
 percentile 
compared to market and marketable limit orders. It is also evident that the maximum values in 

247 
 
S&P 500 stocks, all of which are above 200 mils, are far greater than non-S&P 500 stocks, all of 
which are below 35 mils, and those higher maximum values may be driven by the fact that two 
particular firms that get PFOF rates proportional to the bid-ask spread. 
 
Retail brokers have numerous sources of revenue, including commissions, account 
management and advisory fees, interest income, as well as PFOF. Retail brokers that currently 
receive PFOF tend to earn a somewhat larger share of their revenue from interest on margin 
loans provided to clients. Lending rates tend to be highest for margin amounts under $25,000, 
and fall successively as the size of the loan increases, with the lowest rates on loans exceeding $1 
million. PFOF brokers earned 12% of their income from margin interest in 2021, compared to 
only 1.6% of revenue earned by non-PFOF brokers during the same period.
466
 Another source of 
revenue is securities borrowing, making up 5.1% of revenues for PFOF brokers and 0.9% of non-
PFOF brokers revenue during 2021. In contrast, other revenue lines are relatively underutilized 
by PFOF brokers, such as account supervision fees, which made up 1.3% of revenue for PFOF-
brokers but 26.5% of non-PFOF brokers. 
                                                
466
  Statistics on broker-dealer revenues are from their FINRA Supplemental Statement of Income Form for 
2021. The sample in this discussion is limited to 54 retail brokers that were identified in the CAT analysis 
in Table 7. 19 of these 54 broker-dealers were identified as a PFOF broker if they reported receiving PFOF 
on their Q1 2022 606 report, or if the report of their clearing broker reported receiving PFOF in the event 
that the broker did not publish a Rule 606 report. Broker-dealers or clearing brokers that handled orders on 
a not held basis and did not disclose PFOF information in their Rule 606 report were classified as PFOF 
brokers if disclosures on their websites indicated they received PFOF. The remaining 35 firms comprise the 
sample of non-PFOF brokers. We use the broad definition of sales as we preliminarily believe that many 
firms will just mark “sales” if they have both retail and institutional activity. However, we note that this 
may capture some broker-dealers that do not have retail activity, although we are unable to estimate that 
frequency. 

248 
 
 
In 2020, the Commission adopted a new rule and amended existing rules to establish a 
new infrastructure for consolidated market data,
467
 and the regulatory baseline in this proposal 
includes these changes to the current arrangements for consolidated market data. However, as 
discussed in more detail above, the MDI Rules have not been implemented, and so they have not 
yet affected market practice.
468
 As a result, the data used to measure the baseline below reflects 
the regulatory structure in place for consolidated market data prior to the implementation of the 
MDI Rules.
469
 Accordingly, this section will discuss the Commission’s assessment of the 
potential effects that the implementation of the MDI Rules could have on the baseline 
estimations. 
Among other things, the unimplemented MDI Rules update and expand the content of 
consolidated market data to include: (1) certain odd-lot information
470
; (2) information about 
certain orders that are outside of an exchange’s best bid and best offer (i.e., certain depth of book 
data)
471
; and (3) information about orders that are participating in opening, closing, and other 
auctions.
472
 The rules also introduced a four-tiered definition of round lot that is tied to a stock’s 
average closing price during the previous month.
473
 For stocks with prices greater than $250, a 
                                                
467
  The MDI Rules expanded the data that will be made available for dissemination within the national market 
system (“NMS data”). See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR at 18613.  
468
  For more information about the implementation timeline for the MDI Rules, see supra section III.B.1.b.i. 
469
  For more information about the regulatory structure for consolidated market data prior to the 
implementation of the MDI Rules, see supra section III.B.1.a. 
470
  See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR at 18613. The Commission outlined a phased 
transition plan for the implementation of the MDI Rules, including the implementation of odd-lot order 
information. See MDI Adopting Release, 86 FR at 18698-701. 
471
  See MDI Adopting Release, 86 FR at 18625. 
472
  See MDI Adopting Release, 86 FR at 18630. 
473
 See MDI Adopting Release, 86 FR at 18617. 

249 
 
round lot is defined as consisting of between 1 and 40 shares, depending on the tier.
474
 The rules 
also introduce a decentralized consolidation model under which competing consolidators, rather 
than the existing exclusive SIPs, will collect, consolidate, and disseminate certain NMS 
information.
475
 
Given that the MDI Rules have not yet been implemented, they likely have not affected 
market practice and therefore data that would be required for a comprehensive quantitative 
analysis of a baseline that includes the effects of the MDI Rules is not available. It is possible 
that the baseline (and therefore the economic effects relative to the baseline) could be different 
once the MDI Rules are implemented. The following discussion reflects the Commission’s 
assessment of the anticipated economic effects of the MDI Rules as described in the MDI 
Adopting Release.
476
 
The Commission anticipated that, for stocks priced above $250, the new round lot 
definition will mechanically narrow NBBO spreads for most stocks with prices greater than 
$250.
477
 This could cause statistics that are measured against the NBBO to change because they 
will 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 will be measured 
                                                
474
  See id. The Commission adopted a four-tiered definition of round lot: 100 shares for stocks priced $250.00 
or less per share, 40 shares for stocks priced $250.01 to $1,000.00 per share, 10 shares for stocks priced 
$1,000.01 to $10,000.00 per share, and 1 share for stocks priced $10,000.01 or more per share. 
475
  See MDI Adopting Release, 86 FR at 18637. 
476
  See MDI Adopting Release, 86 FR at 18741-18799. 
477
  An analysis in the MDI Adopting Release showed that the new round lot definition caused a quote to be 
displayed that improved on the current round lot quote 26.6% of the time for stocks with prices between 
$250.01 and $1,000, and 47.7% of the time for stocks with prices between $1,000.01 and $10,000. See 
MDI Adopting Release, 86 FR at 18743. 

250 
 
against a narrower NBBO. In addition, the Commission anticipated that the NBBO midpoint in 
stocks priced higher than $250 could be different under the MDI Rules than it otherwise would 
be, resulting in changes in the estimates for statistics calculated using the 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 NBBO resulting 
from the rule will be higher than the current NBBO midpoint.
478
 More broadly, the Commission 
anticipated that the adopted rules will have these effects whenever the new round lot bids do not 
exactly balance the new round lot offers. However the Commission stated that it does not know 
to what extent or direction such odd-lot imbalances in higher priced stocks currently exist, so it is 
uncertain of the extent or direction of the change.
479
 
The Commission also anticipated that the MDI Rules could result in a smaller number of 
shares at the NBBO for most stocks in higher-priced round lot tiers.
480
 To the extent that this 
occurs, there could be an increase in the frequency with which marketable orders must “walk the 
book” (i.e., consume available depth beyond the best quotes) to execute. This would affect 
statistics that are calculated using consolidated depth information, such as measures meant to 
capture information about whether orders received an execution of more than the displayed size 
at the quote, i.e., “size improvement.” 
                                                
478
  For example, if the NBB is $260 and the national best offer is $260.10, the NBBO midpoint is $260.05. 
Under the adopted rules a 40 share buy quotation at $260.02 will increase the NBBO midpoint to $260.06. 
Using this new midpoint, effective spread calculations will be lower for buy orders but higher for sell 
orders. 
479
  See MDI Adopting Release, 86 FR at 18750. 
480
  However, this effect will depend on how market participants adjust their order submissions. See MDI 
Adopting Release, 86 FR at 18746, for further discussion. 

251 
 
The MDI Rules may also result in a higher number of odd-lot trades, as the inclusion of 
odd-lot quotes that may be priced better than the current NBBO in consolidated market data may 
attract more trading interest from market participants that previously did not have access to this 
information.
481
 However, the magnitude of this effect depends on the extent market participants 
who rely solely on SIP data and lack information on odd-lot quotes choose to receive the odd-lot 
information and would have traded frequently against odd-lot quotes had they known about 
them. The Commission states in the MDI Adopting Release that it believes it is not possible to 
observe this willingness to trade with existing market data.
482
 
The MDI Rules may have implications for broker-dealers’ order routing practices. For 
those market participants that rely solely on SIP data for their routing decisions and that choose 
to receive the expanded set of consolidated market data, the Commission anticipated that the 
additional information contained in consolidated market data will allow them to make more 
informed order routing decisions. This in turn would help facilitate best execution, which would 
reduce transaction costs and increase execution quality.
483
 
The MDI Rules may also result in differences in the baseline competitive standing among 
different trading venues, for several reasons. First, for stocks with prices greater than $250, the 
Commission anticipated that the new definition of round lots may affect order flows as market 
participants who rely on consolidated data will be aware of quotes at better prices that are 
currently in odd-lot sizes, and these may not be on the same trading venues as the one that has 
                                                
481
  See MDI Adopting Release, 86 FR at 18754. 
482
  See id. 
483
  See MDI Adopting Release, 86 FR at 18725. 

252 
 
the best 100 share quote.
484
 Similarly, it anticipated that adding information on odd-lot quotes 
priced at or better than the NBBO to expanded core data may cause changes to order flow as 
market participants take advantage of newly visible quotes.
485
 However, the Commission stated 
that it was uncertain about the magnitude of both of these effects.
486
 To the extent that it occurs, 
a change in the flow of orders across trading venues may result in differences in the competitive 
baseline in the market for trading services.  
Second, exchanges and ATSs have a number of order types that are based on the national 
best bid and offer, and so the Commission anticipated that the changes in the NBBO caused by 
the new round lot definitions may affect how these order types perform and could also affect 
other orders with which they interact.
487
 The Commission stated that these interactions may 
affect relative order execution quality among different trading platforms, which may in turn 
affect the competitive standing among different trading venues, with trading venues that 
experience an improvement/decline in execution quality attracting/losing order flow.
488
 
However, the Commission stated that it was uncertain of the magnitude of these effects.
489
 
Third, the Commission anticipated that, as the NBBO narrows for securities in the 
smaller round lot tiers, it may become more difficult for the retail execution business of 
wholesalers to provide price improvement and other execution quality metrics at levels similar to 
those provided under a 100 share round lot definition.
490
 To the extent that wholesalers are held 
                                                
484
  See MDI Adopting Release, 86 FR at 18744. 
485
  See MDI Adopting Release, 86 FR at 18754. 
486
  See MDI Adopting Release, 86 FR at 18745, 18754. 
487
  See MDI Adopting Release, 86 FR at 18748. 
488
  See id. 
489
  See id. 
490
  See MDI Adopting Release, 86 FR at 18747. 

253 
 
to the same price improvement standards by retail brokers in a narrower spread environment, the 
wholesalers’ profits from execution of individual investor orders might decline,
491
 and to make 
up for lower revenue per order filled in a narrower spread environment, wholesalers may respond 
by changing how they conduct their business in a way that may affect retail brokers. However, 
the Commission stated that is was uncertain as to how wholesalers may respond to the change in 
the round lot definition, and, in turn, how retail brokers may respond to those changes, and so 
was uncertain as to the extent of these effects.
492
 To the extent that this occurs, this may impact 
wholesalers’ competitive standing in terms of the execution quality offered particularly to 
individual investor orders. Where implementation of the above-described MDI Rules may affect 
certain numbers in the baseline, the description of the baseline below notes those effects. 
C. Economic Effects 
The Commission preliminarily believes that the introduction of qualified auctions for 
NMS stocks would increase competition to supply liquidity to marketable orders of individual 
investors. This might enhance order execution quality for individual and institutional investors as 
well as improve price discovery. The magnitude of the improvements in order execution quality 
that individual and institutional investors may experience as a result of this Proposal might be 
less than indicated for a variety of reasons (though it may also be greater), including the 
implementation of MDI Rules, the effect of which is not yet in the data. Under the MDI Rules, 
the availability of faster consolidated market data with more data on odd-lot information, 
auctions information, and depth of book information from competing consolidators could result 
                                                
491
  Individual investor orders typically feature lower adverse selection than other types of orders, such as 
institutional orders. See supra section II.D.2 and supra section VII.B.2 for discussion of why it is generally 
more profitable for liquidity providers to execute against orders with lower adverse selection risk.  
492
  See MDI Adopting Release, 86 FR at 18748. 

254 
 
in improved execution quality for customer orders were their broker-dealers who currently utilize 
SIP data switch to using the expanded consolidated market data.
493
 Nevertheless, the 
Commission preliminarily believes that the Proposal would lead to improvements in individual 
and institutional investor order execution quality, as well as improvements in price discovery, 
relative to a baseline in which MDI Rules are implemented. 
The Commission acknowledges considerable uncertainty in the costs and benefits of this 
rule because the Commission cannot predict how different market participants would adjust their 
practices in response to this rule. The Proposal would likely cause wholesalers and some retail 
brokers to incur significant adjustment costs to their operations. It is unknown whether the 
current industry practice of routing nearly all retail order flow to wholesalers would persist were 
the Commission to adopt this rule, because wholesalers might charge for this service and retail 
brokers might find it more profitable to develop their own routing services. On the other hand, 
wholesalers may still find the practice of routing to be profitable were there to remain an 
information advantage, and due to the proposed exception to be able to execute a segmented 
order at a price equal to or better than NBBO midpoint without exposing it in a qualified auction. 
Among the possible effects are a decline in profitability for wholesalers. Some retail 
brokers could also experience costs from wholesalers reducing the amount of PFOF they pay to 
retail brokers or from reducing or charging for the order handling services they offer to retail 
brokers. Some of these costs could ultimately be passed on to individual investors, such as 
through the resumption of commissions for NMS stock trades being charged by some retail 
                                                
493
  See supra note 421 for further details on how the MDI Rules adopted in the MDI Adopting Release could 
affect the NBBO. It is unclear how benefits in execution quality will change because of uncertainty 
regarding how the price improvement wholesalers provide to individual investors will change as well as 
uncertainty regarding how the NBBO midpoint will change for stocks with prices above $250 once the 
MDI Rules are implemented. 

255 
 
brokers.
494
 Market participants would also incur compliance costs, such as exchanges and NMS 
Stock ATSs incurring costs for creating qualified auctions, as well as broker-dealer and trading 
center compliance costs related to establishing policies and procedures for identifying and 
handling segmented orders and originating brokers that submit segmented orders. NMS plans 
and their participants (including the exchanges and FINRA) would incur compliance costs in 
order to update the consolidated market data feeds and to broadcast qualified auction messages. 
FINRA would incur compliance costs to update the ADF and to broadcast qualified auction 
messages. 
As discussed above, this section measures the economic effects of the proposed 
amendments relative to a regulatory baseline that includes the implementation of the MDI 
Rules.
495
 Furthermore, this section reflects the Commission’s assessment of the anticipated 
economic effects of the proposed amendments, including potentially countervailing or 
confounding economic effects from the MDI Rules.
496
 However, given that the MDI Rules have 
not yet been implemented, they likely have not affected market practice and therefore data that 
would be required for a comprehensive quantitative analysis of the economic effects that 
includes the effects of the MDI Rules are not available. It is possible that the economic effects 
relative to the baseline could be different once the MDI Rules are implemented. Where 
implementation of the above-described MDI Rules may affect certain numbers, the description 
of the economic effects below notes those effects.  
                                                
494
  See infra section VII.C.2.b.ii for a discussion of the possibility of the return of commission fees. 
495
  See supra section VII.B.7. 
496
  See supra section VII.B.7 for a discussion of the Commission’s anticipated economic effects of the MDI 
Rules as stated in the MDI Adopting Release. 

256 
 
 
 
The Commission believes that the Proposal would increase competition among market 
participants to provide liquidity to marketable orders of individual investors.
497
 The majority of 
individual investors’ marketable orders are currently internalized by wholesalers without 
competition at the order-by-order level.
498
 The Commission believes that, by introducing an 
auction mechanism that allows market participants to bid for individual investor orders that 
would otherwise be internalized by wholesalers, Proposed Rule 615 and the proposed 
amendments to Rule 600 would facilitate competition to provide liquidity to individual investors 
by drawing additional liquidity from market participants other than the wholesalers that handle 
the majority of individual investor orders.
499
 Marketable orders internalized by wholesalers 
feature lower price impacts, i.e., have lower adverse selection risk.
500
 Thus, the lower adverse 
selection risk of the order flow that would be routed to qualified auctions would incentivize 
market participants to trade against this flow via auction participation, as market participants 
                                                
497
  The Proposal would also increase competition among market participants to supply liquidity to beyond-the-
midpoint non-marketable limit orders of individual investors because these orders could not be executed at 
restricted competition trading centers at prices beyond the midpoint unless they met one of the other 
exceptions to Proposed Rule 615. However, as shown below in Table 20, the majority of beyond-the-
midpoint non-marketable limit orders are not internalized. Additionally, Table 20 also shows that the 
executed volume of beyond-the-midpoint non-marketable limit orders submitted by individual investors 
and routed to wholesalers is significantly smaller than the volume of marketable limit orders. Therefore, an 
increase in competition to supply liquidity to these orders may be more limited than for the marketable 
orders of individual investors. The Commission does not believe that the Proposal would have a significant 
effect on the competition to execute the fractional share portions of individual investor orders that may 
qualify for the exception in Proposed Rule 615(b)(5). 
498
  See supra note 454. 
499
  Although the Proposal is predicted to improve execution quality for individual investors, it is likely that 
profits for some market participants would be reduced, including some wholesalers and some retail brokers. 
See infra sections VII.C.2.c and VII.C.2.d for a discussion of these potential costs. Potential costs to other 
market participants are discussed elsewhere in infra section VII.C.2. 
500
  See supra section VII.B.2.b. 

257 
 
would find providing liquidity against this order flow more attractive relative to the LOB or to 
individual investor orders with greater adverse selection that may currently be routed to 
exchanges.  
The Commission is mindful of the limitations faced by investors who lack access to 
algorithmic trading technologies, e.g., individual investors and professional traders relying on 
displayed screens, to determine when to provide liquidity in qualified auctions. The proposed 
100-millisecond minimum auction length would be too short for such investors to be able to 
participate in these auctions unless they have to access algorithmic trading technology.
501
 
Additionally, the Proposal would prohibit exchange RLPs (unless they operated via one of the 
exceptions to qualified auctions), which would further constrain the ability of these market 
participants to compete to supply liquidity to segmented orders by limiting their ability to quote 
at sub-penny increments.
502
 However, the Commission believes that market participants with 
access to algorithmic trading technology, including SORs used for trading institutional orders, 
would be able to participate in qualified auctions and thereby enhance the competition to provide 
liquidity to individual investors.  
Competition to supply liquidity through qualified auctions would further be enhanced by 
the proposed implementation of a 5 mil (i.e., $0.0005) per share auction fee and rebate cap for 
                                                
501
  The possibility of adverse price movement (“adverse fade” probability) during an auction is discussed in 
infra section VII.C.2.b.  
502
  Consequently, these market participants could only compete to provide liquidity to segmented orders via 
exchange LOBs or ATSs. However, quoting on exchanges and ATSs can only take place at 1-cent price 
increments and the quoted midpoint. Therefore, if these participants wanted to provide a more competitive 
price relative to qualified auctions, they would be required to quote at the next better full-penny price or at 
the midpoint (for a tick-constrained stock). In contrast, participants of qualified auctions would be able to 
compete by providing liquidity at prices that are only 0.1 cents better than the existing auction price. As 
such, under qualified auctions, competition to provide liquidity to segmented order flow at better prices 
would be incrementally more costly for investors who lack access to smart order routers, placing these 
participants at a disadvantage relative to participants with access to smart order routers. 

258 
 
executed auction responses and a 5 mil per share rebate cap for segmented orders priced at $1.00 
per share or greater.
503
  
First, the Commission believes that the proposed auction fee and rebate caps would help 
ensure that exchanges and ATSs have sufficient incentives to operate qualified auctions. Using 
information from the financial statements of the three major exchange groups which collectively 
account for the overwhelming majority of trading volume on exchanges, the Commission 
estimates that the average total net capture
504
 for exchanges is currently around 4 mils for all 
trading types.
505
 However, the Commission understands based on Staff conversations with 
industry members that the net capture for the executions of orders during continuous trading 
hours (but not open or close auctions) priced at $1.00 per share or greater is likely close to 2 
mils. The Commission expects that in response to the 5 mil auction fee and rebate cap for 
executed auction responses priced at $1.00 per share or greater, open competition trading could 
charge fees of around 5 mils to executed auction responses and provide rebates of approximately 
3 mils to broker-dealer submitting the segmented order to the qualified auction, and thus 
maintain a net capture of approximately 2 mils for these transactions. For the executions of 
                                                
503
  Qualified auction fee and rebate caps would be limited to 0.05% of the auction response price per share for 
executed auction responses and segmented orders priced at less than $1.00 per share in Proposed Rule 
615(c)(4). Additionally, the Proposal would require that qualified auction fees and rebates be the same for 
all of its auction participants, i.e., volume-based tiering, which tends to advantage large liquidity suppliers 
who transact in sufficient volumes to trigger lower fees and/or higher rebates, would not apply to qualified 
auction fees and rebates. Under the proposed rule, no fee could be charged for submission or execution of a 
segmented order, or for submission of an auction response. See supra section IV.C.4. 
504
  Net capture refers to the difference between average fees levied and rebates paid. 
505
  Intercontinental Exchange, the parent firm of NYSE, reports on page 51 of its 2021 10k filing that its net 
capture for U.S. equity transactions was approximately 4.2 mils in 2021. Nasdaq did not report its net 
capture in their 10K filing, however Nasdaq provides information on their investor relations webpage 
which, when we average the relevant 2021 volumes, indicates that the average net capture across all 
Nasdaq platforms for U.S. equity transactions was 5.9 mils (see Nasdaq 2022/2021 Monthly Volumes, 
available at https://ir.nasdaq.com/static-files/465d2157-c476-4546-a9f7-8d7ad0c9be77). Cboe reports in 
their 2021 Form 10-K filing that their net capture for U.S. equity transactions was approximately 2 mils.  

259 
 
orders priced below $1.00 per share on exchange LOBs, the Commission estimates that 
exchanges have an average net capture of around 0.28% of the transaction value;
506
 thus, for 
these orders under $1.00, the net capture may be lower than what they earn on exchange LOB 
transactions. However, qualified auction hosts may be able to compensate for this decline, e.g., 
by reducing rebates for segmented orders priced at $1.00 per share or greater to 1 mil or 
otherwise cross-subsidizing segmented orders priced below $1.00 per share with access fees 
charged on their LOB, with the overall goal to at least maintain their overall total net capture of 
around 2 mils for trading on their exchange.
507
 
Second, the proposed 5 mil auction fee and rebate cap for executed auction responses 
priced at $1.00 per share or greater would likely result in qualified auction fees and rebates that 
would be unlikely to have a significant impact on the price improvement auction bidders would 
be able to offer because the 5 mil fee and rebate cap is smaller than the minimum pricing 
increment in qualified auctions. Since larger fees limit the ability of liquidity suppliers to offer 
better prices, setting a lower auction fee cap could result in improved execution quality for the 
segmented order. Furthermore, the auction rebate cap of 5 mils for segmented orders is likely to 
limit the competitive bidding advantage of the broker-dealer submitting the segmented order to 
the qualified auction. The maximum rebate of 5 mils is smaller than the minimum pricing 
                                                
506
  The estimate for the 0.28% net capture, which is the difference between fees received and rebates paid out 
by the exchange, is obtained by an analysis of current fee and rebate schedules based on Rule 19b-4 filings 
with the Commission for each of the equity exchanges operating in the United States as of June 1, 2022, as 
well as a review of the transaction prices that each exchange posts. This amount is because, for transactions 
under $1.00 per share, most exchanges set their baseline fee at 0.30% but do not offer baseline rebates, and 
some charge fees to both sides of the transaction leading to more than 0.30% per trade earned by the 
exchange. 
507
  The assumption that the exchanges earn an average 2 mil spread on trading behavior is discussed above in 
this section. The Commission believes that it is reasonable to assume that the exchanges would fund 
qualified auction rebates through access fees, either from qualified auctions or the continuous order book. 
The Commission believes that it is reasonable to assume that the exchanges overall would try to continue to 
earn approximately 2 mils per transaction under the Proposal, but the Commission acknowledges that there 
is some uncertainty regarding this assumption and seeks public comment. 

260 
 
increment in the auction, which limits the ability of the broker-dealer submitting the segmented 
order to use the rebate to subsidize the price improvement they offer in their qualified auction 
bids. 
Third, the Commission believes that the caps on qualified auction fees and rebates would 
incentivize open competition trading centers to compete more on the basis of execution quality, 
rather than fees and rebates, in order to attract segmented orders. The 5 mil rebate cap for 
segmented orders priced at $1.00 per share or greater would result in rebates that are 
significantly lower than the rebates that are currently offered by most exchanges in these stocks. 
Academic literature has shown that the presence of high liquidity fees and rebates on some 
market centers may impact broker-dealer routing decisions based on where they can receive the 
highest rebate (or pay the lowest fee), rather than where they can receive better execution quality 
on behalf of their customers.
508
 In contrast, with the 5 mil rebate cap, the effect of rebates on 
qualified auction participants for stocks with prices greater than $1.00 may be sufficiently small 
as to have a minimal impact on overall market structure or behavior.
509
 This would limit the 
degree to which open competition trading centers could use rebates to attract segmented orders to 
their qualified auctions and help incentivize them to compete more on the basis of the execution 
quality of their auctions.  
 In addition, the Commission believes that proposed minimum price increments under 
Proposed Rule 615(c)(3)
510
 would further enhance competition to supply liquidity to marketable 
                                                
508
  See, e.g., Robert H. Battalio, Shane A. Corwin & Robert Jennings, Can Brokers Have It All? On the 
Relation Between Make-Take Fees and Limit Order Execution Quality, 71 J. Fin. 2193 (2016). 
509
  All but two exchanges do not offer a rebate for transactions priced below $1.00 per share. Thus, for these 
transactions, the proposed auction fee and rebate cap for executed auction responses would likely not result 
in lower rebates. 
510
  Under proposed Rule 615(c)(3), segmented orders and auction responses must be priced in an increment of 
no less than $0.001 (or 0.1 cent) if their prices are $1.00 or more per share, in an increment of no less than 

261 
 
individual investor orders through qualified auctions, as smaller price increments are likely to 
encourage greater amounts of price improvement. However, lowering the price increment 
beyond that proposed may increase the possibility of market participants seeking to gain 
execution priority by pricing their auction responses in economically small increments. Thus, the 
size of the proposed price increment that has been chosen for qualified auctions is intended to 
increase price improvement while still reducing the likelihood of participants using economically 
insignificant price increments. 
 
The Proposal likely would reduce transaction costs for individual investors due to 
improved competition to supply liquidity to individual investor orders.
511
 By making marketable 
order flow from individual investors that is currently internalized by wholesalers and executed at 
prices less favorable than midpoint accessible to other market participants in qualified auctions, 
the Proposal would allow additional market participants an opportunity to compete to directly 
trade with these individual investor orders.
512
 The Commission estimates that the potential 
benefit to individual investors from this increased competition, the competitive shortfall rate, 
would range between an average of 0.86 bps to 1.31 bps for marketable orders that met the 
definition of a segmented order.
513
 Based on Commission estimates that between 7.3% to 10.1% 
                                                
$0.0001 (or 0.01 cent) if their prices are less than $1.00 per share, or at the midpoint of the NBBO. See 
supra section IV.C.3. 
511
  See supra section VII.C.1.a for discussion of improvements in competition to supply liquidity to segmented 
orders in qualified auctions. 
512
  See infra section VII.C.1.c for discussions of how the Proposal could also enhance the order execution 
quality of other market participants that would be able to compete to supply liquidity to individual investor 
orders, including institutional investors.  
513
  As discussed in supra section VII.B.7, the Commission believes that the implementation of qualified 
auctions would lead to improvements in execution quality relative to a baseline in which the MDI Rules are 
implemented, i.e., over and above any improvements in execution quality that may result from the 
implementation of the MDI Rules. Once implemented, the changes to the current arrangements for 

262 
 
of total executed dollar volume would be segmented orders that would be eligible to be included 
in qualified auctions, the Commission preliminarily estimates that this could potentially result in 
a total average annual savings in individual investor transaction costs, i.e., a total competitive 
shortfall, ranging between $1.12 billion to $2.35 billion dollars.
514
 The Commission 
acknowledges that there is considerable uncertainty in these estimates.
515
 Additionally, these 
estimates account only for potential changes in individual order transaction costs and assumes 
that the PFOF wholesalers currently pay to retail brokers would be converted into additional 
price improvement for the individual investor order. Furthermore, the estimates do not account 
for the potential return of commission fees charged by retail brokers.
516
 As discussed in further 
detail below,
517
 the Commissioner does not believe that retail brokers will respond to the loss of 
                                                
consolidated market data in the MDI Adopting Release may impact the magnitude of the benefit from the 
proposal for individual investors, but the effects are uncertain. Trading costs are measured against the 
NBBO midpoint and, as discussed in supra note 421, there is uncertainty regarding how the NBBO 
midpoint will change for stocks priced above $250 when the MDI Rules are implemented. It is also 
uncertain how or to what degree changes in trading costs would differ between trades executed at 
exchanges and wholesalers. Since the benefit is measured based on the differences in exchange and 
wholesaler realized spreads, if both realized spread measures changed similarly, then there would not be 
changes in relative differences between their reported spread measures and the estimated benefit would not 
change. 
514
  See infra Table 19. The Commission preliminarily believes that, in order for a wholesaler to effectively 
compete against other bidders in qualified auctions, the wholesaler would have to reduce the PFOF it is 
paying to the retail broker in order to bid more aggressively to potentially win the qualified auction. This 
would result in the reduction in PFOF instead going to the customer as additional price improvement, 
which would be reflected in the competitive shortfall calculation. The competitive shortfall estimates do not 
include costs that may arise in the form of potential increases in (or the return of) commissions retail 
brokers charge to individual investors or other reductions in the services that retail brokers currently offer, 
both of which may occur if the Proposal reduces the PFOF paid to retail brokers or results in wholesalers 
charging retail brokers for their order handling services. See infra section VII.C.2.b for a discussion of 
costs to individual investors and infra section VII.C.2.d for a discussion of costs to retail brokers. 
515
  The Commission is uncertain about these estimates because the Commission does not know with certainty 
how different market participants would adjust their practices in response to this rule. There is also 
uncertainty in these estimates because of limitations in using the realized spreads to measure the trading 
profits earned by liquidity suppliers. See supra note 426 for additional discussions on the limitations of 
realized spreads.  
516
  Most retail brokers have continued to charge commission fees for (human) broker-assisted orders, 
including those that dropped online trade commission fees. 
517
  See infra section VII.C.2.b.ii. 

263 
 
PFOF revenue by resuming commission fees, but even in the event that total PFOF revenue 
disappears ($940 million, based on Q1 2022 data)
518
 and PFOF brokers charge commission fees 
to fully replace this revenue, this cost increase to traders would still be less than the estimated 
$1.12 billion to $2.35 billion annual gain in price improvement estimated by the Commission.  
As shown by analyses in Table 6, Table 7 and Table 8, the realized spreads earned from 
supplying liquidity to individual investor marketable orders routed to wholesalers are greater 
than realized spreads for comparable marketable order transactions (e.g., similar stocks and order 
sizes) on exchanges, indicating that the additional price improvement that these individual 
investor orders receive does not fully offset the lower adverse selection risk associated with these 
orders.
519
 The Commission estimates the competitive shortfall rate, i.e., the potential additional 
price improvement (and reduction in transaction costs) that the marketable orders of individual 
investors would receive from having their order being exposed to greater competition among 
liquidity suppliers in qualified auctions, as the difference in the realized spreads between 
marketable orders executed on exchanges and individual investor marketable orders that were 
executed after being routed to wholesalers,
520
 after adjusting for exchange rebates that are 
                                                
518
  However, all PFOF revenue might not disappear because wholesalers may continue to pay PFOF for non-
marketable limit orders, which may not be affected by the Proposal and may be based on exchange rebates 
that wholesalers pass through to retail brokers (see supra note 395). The annualized PFOF revenue from 
non-marketable limit orders is estimated to be approximately $275 million, based on Q1 2022 data. See 
supra note 465 for additional information on PFOF revenue in Q1 2022. 
519
  See supra sections VII.B.4 and VII.B.5 for discussions of the differences in realized spreads between 
individual investor marketable orders routed to wholesalers compared to marketable orders routed to 
exchanges. 
520
  This included marketable orders that the wholesalers internalized and also marketable orders that were 
routed to wholesalers and then executed on a riskless principal or rerouted to another venue and executed 
on an agency basis. The Commission does not adjust wholesaler realized spreads for the PFOF they pay to 
retail brokers because PFOF, while a cost to wholesalers, is not a cost to investors. See supra note 514 for 
further discussions on the assumed effects of PFOF for purposes of this analysis.  

264 
 
currently paid to liquidity suppliers on exchanges, as well as for fees (5 mils) that would 
potentially be charged to liquidity suppliers in qualified auctions.
521
  
To illustrate the logic behind this calculation, it is useful to go through the following 
thought experiment. Pick a stock, a day, and a range of order size that is executed by 
wholesalers. Based on Rule 605 data or CAT data, one can calculate the transaction costs that 
retail investors incur for this stock, on this day, and for this range of order size. The question is: 
what would be the transaction costs for those orders if they were sent to competitive auctions? 
Although such auctions as those being proposed here do not exist, the marginal profit required to 
incentivize provision of liquidity on exchanges’ order books can serve as a proxy. This marginal 
profit to liquidity provision can be estimated as the on-exchange realized spread (for a given 
stock, on a given day, and within a given range of order size) plus the estimated rebate that 
exchanges pay the liquidity providers. The estimated transaction cost for the auction equals the 
estimated marginal profit of liquidity providers on exchange order books plus the maximum 5 
mil fee (a lower fee would result in a higher competitive shortfall). The competitive shortfall is 
the difference between the current transaction cost of retail investors off-exchange wholesalers 
and the estimated transaction cost in the auction. Equivalently, one can view this as the 
difference in marginal profits to liquidity provision on and off-exchange (where spreads are 
adjusted by the auction fee rather than by PFOF). 
Competitive shortfall rates are calculated using three different estimates of exchange 
rebates. The first Rebate Base method is calculated based on Commission estimates of average 
                                                
521
  The realized spreads after adjusting for potential exchange rebates to liquidity suppliers are estimated and 
discussed in supra section VII.B.4. In estimating the competitive shortfall rate we also deduct a 5 mil fee 
from the exchange adjusted realized spreads to account for the potential fees charged to liquidity suppliers 
in qualified auctions. The Commission acknowledges that realized spreads are a proxy for the trading 
profits earned by liquidity suppliers. See supra note 426 for further discussion on the limitations of realized 
spreads. 

265 
 
exchange rebates paid to liquidity suppliers on maker-taker exchanges (i.e., exchanges that pay a 
rebate to orders supplying liquidity and charge a fee for orders demanding liquidity) and fees 
charged to liquidity suppliers on inverted exchanges (i.e., exchanges that charge a fee for orders 
supplying liquidity and pay a rebate for orders demanding liquidity) and flat fee exchanges (i.e., 
exchange that don’t pay rebates, but may charge fees for orders both demanding and supplying 
liquidity).
522
 The other two methods, which are calculated to see how the competitive shortfall 
rates vary based on differences in estimates of exchange fees and rebates, are calculated by 
varying the exchange fees and rebates estimated in the Rebate Base method by 25%. The Rebate 
High method estimates higher rebates and lower fees for supplying liquidity and assumes 
exchange rebates on maker-taker venues are 25% greater than in the Rebate Base method and 
exchange fees on inverted and flat fee exchanges are 25% lower than in the Rebate Base 
method.
523
 The Rebate Low method estimates lower rebates and higher fees for supplying 
liquidity and assumes exchange rebates on maker-taker venues are 25% lower than in the Rebate 
Base method and exchange fees on inverted and flat fee exchanges are 25% higher than in the 
Rebate Base method.
524
 
                                                
522
  The estimated exchange rebates for orders supplying liquidity used to calculate the competitive shortfall 
exchange base method are the same as those used to calculate the Realized Spread Rebate differential in 
supra Table 6. See supra note 435 for a discussion of how these estimates of exchange rebates were 
determined. A 5 mil fee is then further deducted to account for the potential fee charged to liquidity 
suppliers in qualified auctions. 
523
  The Rebate High method is calculated assuming that exchange rebates to liquidity suppliers on maker-taker 
exchanges are 34 mils; that exchange fees for supplying liquidity on inverted exchanges are 11 mils; and 
that exchange fees for supplying liquidity on flat fee exchanges are 5 mils. A 5 mil fee is then further 
deducted to account for the potential fee charged to liquidity suppliers in qualified auctions. 
524
  The Rebate Low method assumes that rebates on maker-taker exchanges are 25% lower and fees on 
inverted and flat fee exchanges are 25% higher. For our adjustments we assume: exchange rebates to 
liquidity suppliers on maker-taker exchanges are 20 mils; exchange fees for supplying liquidity on inverted 
exchanges are 19 mils; exchange fees for supplying liquidity on flat fee exchanges are 9 mils. A 5 mil fee is 
then further deducted to account for the potential fee charged to liquidity suppliers in qualified auctions. 

266 
 
The estimates of the overall average competitive shortfall rates and the competitive 
shortfall rates for different types of NMS stocks are presented below in Table 18.
525
 This analysis 
incorporates the contrasting levels of adverse selection risk (price impact) and price 
improvement provided to orders internalized by wholesalers and executed on exchanges. 
Ultimately, the increased price improvement of wholesalers does not match the lower price 
impact of individual investor orders, causing wholesaler realized spreads to exceed exchange 
realized spreads, and competitive shortfall rates to be positive. In order to ensure robustness of 
the results and to account for potential limitations of the coverage of Rule 605 reports,
526
 the 
analysis estimates competitive shortfall rates using data from Rule 605 reports, as well as data 
from CAT. All CAT and Rule 605 estimates of the competitive shortfall rates are positive in all 
three methods, which indicates that the realized spreads earned by wholesalers on the marketable 
orders of individual investors tend to be higher than realized spreads earned by liquidity 
suppliers on exchanges after adjusting for exchange rebates. However, the average competitive 
shortfall rates calculated using data from Rule 605 reports tend to be lower than those estimated 
from CAT data. Rule 605 estimated competitive shortfall rates using the Rebate Base, Low, and 
High methods are 0.58 bps, 0.77 bps, and 0.38 bps, respectively, while CAT estimated 
competitive shortfall rates using the Rebate Base, Low, and High methods are 1.08 bps, 0.86 bps, 
and 1.31 bps, respectively. The differences appear to be mainly driven by differences between 
the exchange realized spreads calculated using Rule 605 and CAT data. Exchange realized 
                                                
525
  Competitive shortfalls are calculated using the same methodology for calculating realized spreads that is 
described in Table 6 and Table 7, but the amount for exchange rebates adjustments may be different 
depending on the rebate method used. Additionally, the competitive shortfall deducts a 5 mil fee from the 
exchange adjusted realized spreads to account for the potential fees charged to liquidity suppliers in 
qualified auctions, which is not included in the realized spread differential calculations. 
526
  See supra section VII.B.4 discussing limitations of Rule 605 coverage. 

267 
 
spreads calculated using CAT data tend to be lower than those calculated using Rule 605 data, 
with CAT data estimating an average exchange realized spread of -1.22 bps for all stocks and 
Rule 605 data estimating an average exchange realized spread of -0.67 bps. This difference could 
be driven by the CAT data having broader coverage of marketable orders than Rule 605 data.
527
 
The analysis in Table 7 supports this by showing that sample from CAT data contains over $16 
trillion in trading volume from marketable orders routed to exchanges in Q1 2022, while Table 6 
shows that the sample from Rule 605 data is smaller, containing over $9 trillion in trading 
volume from marketable orders routed to exchanges.
528
 Given the broader coverage of the CAT 
exchange data, the Commission believes that the estimates derived from sample from the CAT 
data provide a more complete estimate of the realized spreads for marketable orders executed on 
exchanges than the sample from the Rule 605 data. Therefore, the Commission believes that the 
range of the estimated competitive shortfall rate from the CAT data, 0.86 bps to 1.31 bps may be 
a more representative measurement of the realized spread difference between individual investor 
marketable orders executed by wholesaler and marketable orders executed on exchanges.
529
 
The estimates in Table 18 indicate that the competitive shortfall rate appears to be higher 
in non-S&P 500 stocks than in S&P 500 stocks and ETFs, with non-S&P 500 competitive 
                                                
527
  The different time horizons used for the calculation of the realized spreads could also contribute to the 
observed difference in realized spreads between the samples, with the CAT sample calculating realized 
spreads at the one minute horizon and Rule 605 data calculating spreads at the 5 minute horizon. However, 
Conrad and Wahal (2020) examined realized spreads at different horizons and found that realized spreads 
measured at the 5 minute horizon tended to be lower than realized spreads measured at the 1 minute 
horizon, which indicates that the different time horizons may not be a significant driver of the difference in 
realized spreads between the two samples. 
528
  Note that the samples in Table 6 and Table 7 are filtered to be limited to orders under $200,000 in value. 
However, the trading volume for the CAT sample is still larger than the exchange trading volume for the 
unfiltered sample from Rule 605 data shown in Table 5. 
529
  The Commission acknowledges that there is uncertainty in these estimates. See supra note 515 for 
additional discussions.  

268 
 
shortfall rates of 3.07 bps under the Rebate Base method computed using CAT data, compared to 
the competitive shortfall rates of 0.44 bps and 0.34 bps for S&P 500 stocks and ETFs 
respectively. These results are consistent with the results shown in Table 8, which indicate that 
the differences in realized spreads between individual investor marketable orders executed at 
wholesalers and marketable orders executed at exchanges are larger in less liquid stocks.
530
 
Additionally, the estimates in Table 18 indicate that exchanges’ rebates tend to have a larger 
effect on the competitive shortfall rate for non-S&P 500 stocks, with these types of stocks 
showing the greatest variation in the competitive shortfall rates estimated by the Rebate Low and 
Rebate High methods. 
Table 18: Competitive Shortfall Rates Estimates 
Data 
Source 
Stock Type All S&P 500 Non-S&P 500 ETF 
Rule 605 
WH Realized Spread (bps) 
0.72 0.30 1.55 0.64 
Rule 605 
EX Realized Spread (bps) 
-0.67 -0.30 -1.97 -0.12 
Rule 605 
EX Realized Spread Adj Rebate Base (bps) 
-0.001 -0.05 -0.24 0.28 
Rule 605 
EX Realized Spread Adj Rebate High (bps) 
0.19 0.02 0.25 0.41 
Rule 605 
EX Realized Spread Adj Rebate Low (bps) 
-0.20 -0.12 -0.73 0.15 
CAT 
WH Realized Spread (bps) 0.85 0.42 2.00 0.51 
CAT 
EX Realized Spread (bps) -1.22 -0.28 -3.90 -0.34 
CAT 
EX Realized Spread Adj Rebate Base (bps) -0.40 -0.06 -1.54 0.08 
CAT 
EX Realized Spread Adj Rebate High (bps) -0.18 0.00 -0.90 0.20 
CAT 
EX Realized Spread Adj Rebate Low (bps) -0.63 -0.12 -2.19 -0.05 
Rule 605 
Competitive Shortfall Rebate Base (bps) 
0.58 0.30 1.42 0.26 
Rule 605 
Competitive Shortfall Rebate High (bps) 
0.38 0.23 0.93 0.13 
Rule 605 
Competitive Shortfall Rebate Low (bps) 
0.77 0.37 1.91 0.38 
CAT 
Competitive Shortfall Rebate Base (bps) 1.08 0.44 3.07 0.34 
CAT 
Competitive Shortfall Rebate High (bps) 0.86 0.38 2.42 0.22 
CAT 
Competitive Shortfall Rebate Low (bps) 1.31 0.50 3.71 0.46 
This table shows estimates of competitive shortfall rates, wholesaler realized spreads, and exchange realized 
spreads after adjusting for exchange rebates. Competitive shortfall is estimated by subtracting realized spreads 
on marketable orders routed to exchanges after adjusting for exchange rebates and fees for liquidity suppliers 
in qualified auctions from realized spreads on marketable orders routed to wholesalers. Estimates are 
calculated using three different competitive shortfall estimation methods to account for exchange rebates: (1) 
Competitive Shortfall Rebate Base (“Base”) method (see supra note 522); (2) Competitive Shortfall Rebate 
                                                
530
  See supra section VII.B.4 for a discussion of the analysis in Table 8. 

269 
 
High (“High”) method (see supra note 523); and (3) Competitive Shortfall Rebate Low (“Low”) method (see 
supra note 524).
 
 
The competitive shortfall estimates are calculated separately for samples from Rule 605 data and CAT data 
and are derived from the execution quality stats for marketable orders under $200,000 described in detail in 
Table 6 (Rule 605 data) and Table 7 (CAT data). For the sample from Rule 605 data, the difference in dollar 
realized spread measures between exchanges and wholesalers are estimated by subtracting the average rebate 
adjusted exchange realized spread (using estimated exchange rebate rates from one of the competitive shortfall 
rebate method estimates) and also deducted a 5 mil fee (to account for the potential fee charged to liquidity 
suppliers in qualified auctions) from the adjusted wholesaler average realized spread at the stock-month-order 
size category level for the combined market and marketable limit order types with average order size category 
dollar values less than $200,000 (average order dollar values were determined for each order-size category 
stock-month by dividing the total number of covered shares in the order size category by the total number of 
covered orders and then multiplying by the stock-month’s average VWAP), calculated from Rule 605 reports. 
The share weighted averages of the wholesaler and exchange realized spread differences are then determined 
at the individual stock-month level by share-weighting across different order-size categories based on the 
number of shares executed (at the market center + away) in wholesalers’ Rule 605 reports in that order-size 
category. Percentage realized spread differences are then calculated by dividing the dollar realized spread 
differentials by the stock-months VWAP as estimated by TAQ. The weighted average of the individual stock-
month percentage realized spread differentials are averaged together based on weighting by the total 
wholesaler dollar trading volume in that stock-month for the combined marketable order type (wholesaler 
dollar trading volume is estimated by multiplying the Rule 605 report wholesaler total executed share volume, 
i.e., the share volume executed at market center + share volume executed away from the market center, for the 
stock-month-order type by the stock’s monthly VWAP). A similar methodology was used to calculate the 
CAT competitive shortfall measures, but the share weighted volume estimates were calculated up to the 
individual stock-week-order-size level and then these values were aggregated together based on a weighted 
average using the total wholesaler dollar trade volume executed in that category. The realized spread measures 
reported are the average wholesaler and exchange adjusted rebates (adjusting for the exchange rebates 
reported under this method but not including the 5 mil fee deduction for the qualified auction fees) used to 
compute the competitive shortfall rates. 
Table 18 estimates the average annual total competitive shortfall (i.e., the average total 
annual estimated dollar value of improvements in individual investor transaction costs) by 
multiplying the competitive shortfall rate by an estimate of the total annual dollar volume of 
segmented orders that could potentially participate in qualified auctions. Because the 
Commission is uncertain about the volume of orders that would participate in qualified auctions, 
the analysis uses three different scenarios to estimate the dollar volume of individual investor 
orders that may participate in qualified auctions.
531
 Under the Base segmented order volume 
                                                
531
  The percentage multipliers used in these volume estimates were estimated from an analysis of CAT data in 
Jan. 2022. The analysis found that wholesalers trading in an off-exchange principal capacity against orders 
originating from an FDID Individual customer account type accounted for 12.36% of the total consolidated 
dollar volume reported by the SIP during the month. Of these individual orders, 36.78% of the executed 

270 
 
scenario, the Commission analysis assumes that all individual investor orders under $200,000 
would be exposed in qualified auctions, which is estimated to constitute 7.8% of total executed 
dollar volume.
532
 Under the Low segmented order volume scenario, the Commission analysis 
assumes that only individual investor marketable orders under $200,000 would be exposed in 
qualified auctions, which is estimated to constitute 7.3% of total executed dollar volume.
533
 
Because some broker-dealers may submit segmented orders over $200,000 to qualified auctions 
if it would result in the order receiving better price improvement,
534
 under the High segmented 
order volume scenario, the Commission analysis assumes that 50% of individual investor orders 
over $200,000 would also be exposed in qualified auctions, which is estimated to constitute 
10.1% of total executed dollar volume.
535
 These scenarios include orders executed by 
wholesalers at prices at or better than NBBO midpoint, though should these orders continue to 
                                                
dollar volume originated from orders with dollar values of $200,000 or greater. Of the remaining orders, 
5.90% of the executed dollar volume belonged to orders that were not market or marketable limit orders.  
532
  The Base Scenario estimate of 7.80% as the percentage of total dollar volume that could potentially be 
segmented orders that could be exposed in qualified auctions is estimated by multiplying the 12.36% of 
total executed dollar volume belonging to individual accounts and executed by wholesalers in a principal 
capacity by the 63.22% (1-36.78%) of this executed dollar volume from orders that were less than 
$200,000.  
533
  The Low Scenario estimate of 7.34% as the percentage of total dollar volume that could potentially be 
segmented orders that could be exposed in qualified auctions is estimated by multiplying the 12.36% of 
total executed dollar volume belonging to individual accounts and executed by wholesalers in a principal 
capacity by the 63.22% (1-36.78%) of this executed dollar volume from orders that were less than 
$200,000. This was then multiplied by 94.1% (1-5.9%) to account for the assumption that only market and 
marketable limit orders would be submitted to qualified auctions.  
534
  Proposed Rule 615 would create an exception in which segmented orders with a dollar value of $200,000 
or greater may be executed at a restricted competition trading center without being exposed in a qualified 
auction. However, the exception still allows these orders to be submitted to qualified auctions.  
535
  The High Scenario estimate of 10.08% as the percentage of total dollar volume that could potentially be 
segmented orders that could be exposed in qualified auctions is estimated by multiplying the 12.36% of 
total executed dollar volume belonging to individual accounts and executed by wholesalers in a principal 
capacity by 81.61% (1-36.78%/2), which is the percentage of the remaining executed dollar volume of 
orders originating from individual investor that are less than $200,000 plus 50% of the executed dollar 
volume of individual orders that were $200,000 or greater, which would be submitted to qualified auctions 
under this scenario. 

271 
 
receive this execution via the exception to the rule then they would not be sent to qualified 
auctions. This is appropriate given that these orders are also included in the analysis examining 
the execution quality of individual investor marketable orders routed to wholesalers.
536
 
Therefore, removing these orders from the analysis would serve to increase the realized spread 
for wholesalers and thus increase the competitive shortfall for the remaining percentage of total 
executed dollar volume.  
Table 19 estimates the average annual total competitive shortfall under the three 
segmented order volume scenarios for each of the three different competitive shortfall rebate 
methods. The table presents estimates for both the sample from Rule 605 data and the sample 
from CAT data. The total competitive shortfalls estimated for the Rule 605 sample are smaller 
than those estimated for the CAT sample. The Rule 605 data sample Rebate Base method 
estimates total competitive shortfalls ranging between $800 million and $1.0 billion dollars for 
the Low and High segmented order volume scenarios, respectively, while the CAT data sample 
Rebate Base method estimates total competitive shortfalls ranging between $1.5 billion and $1.9 
billion dollars. As discussed above in this section, given the broader coverage of the CAT 
exchange data, the Commission believes the estimated competitive shortfall rates derived from 
the CAT data are more representative than those derived from Rule 605 data. The total 
competitive shortfall estimated from the CAT data sample using the Rebate High method ranges 
between $1.1 billion and $1.5 billion dollars over the different segmented order volume 
scenarios, while the estimates from the Rebate Low method range between $1.7 billion to $2.3 
billion dollars. Given the uncertainty regarding the estimates of average exchange rebates and the 
                                                
536
  Marketable orders that are routed to wholesalers and executed at the NBBO midpoint or a more favorable 
price are included in the analysis in Table 6, Table 7, Table 18, and Table 19, as well as additional analysis 
based on the data used in these table. 

272 
 
volume of segmented orders that would be exposed to qualified auctions, the Commission 
estimates that the average annual total competitive shortfall, i.e., the total annual average 
reduction in individual investor transactions cost, from the Proposal may range between $1.1 
billion dollars and $2.3 billion dollars.
537
  
Table 19: Total Annual Competitive Shortfall Dollar Values under Different Volume Scenarios 
 
 
Segmented Order Volume Scenario 
Data 
Source Competitive Shortfall 
Scenario 
Base (7.80% of Total 
Executed Dollar 
Volume) 
Low (7.34% of Total 
Executed Dollar 
Volume) 
High (10.08% of 
Total Executed 
Dollar Volume) 
Rule 
605 
Competitive Shortfall 
Rebate Base (0.58 bps) 
$800 million $753 million $1.03 billion 
Rule 
605 
Competitive Shortfall 
Rebate High (0.38 bps) 
$530 million $499 million $684 million 
Rule 
605 
Competitive Shortfall 
Rebate Low (0.77 bps) 
$1.07 billion $1.01 billion $1.38 billion 
CAT Competitive Shortfall 
Rebate Base (1.08 bps) $1.50 billion $1.41 billion $1.94 billion 
CAT Competitive Shortfall 
Rebate High (0.86 bps) $1.20 billion $1.12 billion $1.54 billion 
CAT Competitive Shortfall 
Rebate Low (1.31 bps) $1.82 billion $1.71 billion $2.35 billion 
This table estimates the total annual competitive shortfall dollar amounts by multiplying the competitive 
shortfall rates for the different method in Table 18 by an estimate of the total annual dollar trading volume that 
could be exposed in qualified auctions under three different scenarios: The Base Volume Scenario (discussed in 
supra note 532), the Low Volume Scenario (discussed in supra note 533) and the High Volume Scenario 
(discussed in supra note 535 ). The total annual dollar trading volume that could be exposed in qualified auctions 
under a scenario is estimated by multiplying the scenario’s estimate of the percentage of executed total dollar 
volume by four times the Total Executed Dollar Volume in Q1 2022, which equaled $44.54 trillion. Total 
Competitive Shortfall Dollar Value is estimated by multiplying Competitive Shortfall Rate by the estimate of the 
total annual dollar trading volume that could be exposed in qualified auctions under a scenario.  
 A proposed exception from being required to send individual investor orders to qualified 
auctions under the Proposal is if handling broker-dealers choose to execute individual investor 
orders at prices equal to the NBBO midpoint or better. The analysis in Table 10 presents 
                                                
537
  This estimate only accounts for potential changes in individual order transaction costs and assumes the 
PFOF that wholesalers currently pay to retail brokers would be converted into additional price 
improvement for the individual investor order. The competitive shortfall estimates do not include costs that 
may arise in the form of potential increases in (or the return of) commissions retail brokers charge to 
individual investors or other reductions in the services that retail brokers currently offer. See supra note 514 
for additional details.  

273 
 
evidence that wholesalers execute 46% of the shares they internalize at prices equal to or better 
than the midpoint. Analysis of CAT data indicates that there is often additional midpoint 
liquidity available on exchanges and NMS Stock ATSs 
  Table 20 uses CAT data from March 2022 to examine the non-displayed liquidity 
available at the NBBO midpoint on exchanges and NMS Stock ATSs at a moment in time when 
a wholesaler internalizes an individual investor marketable order at a price less favorable (to the 
customer) than the NBBO midpoint.
538
 The results indicate that, on average,
539
 51% of the shares 
of individual investor marketable orders internalized by wholesalers are executed at prices less 
favorable than the NBBO midpoint (Wholesaler Pct Exec Shares Worse Than Midpoint). Out of 
these individual investors shares that were executed at prices less favorable than the midpoint, on 
average, 75% of these shares could have hypothetically executed at a better price against the 
                                                
538
  More specifically, the analysis uses CAT data to look at the total shares available at the NBBO midpoint 
that originate from hidden midpoint pegged orders on exchanges and NMS Stock ATSs. The analysis 
compares the size of an individual investor marketable order that was internalized in a principal capacity by 
a wholesaler at a price less favorable than the NBBO midpoint (measured at the time the wholesaler 
received the order) to the total shares of midpoint liquidity (originating from midpoint peg orders) at the 
NBBO midpoint on exchanges and NMS Stock ATSs at the time the individual investor order is executed 
in order to hypothetically see how many additional shares could have gotten price improvement if they had 
executed against the hidden liquidity available at the NBBO midpoint. A midpoint peg order is a type of 
hidden order whose price automatically adjusts with the NBBO midpoint. The analysis looks at midpoint 
peg orders on exchanges and ATSs during normal market hours (midpoint peg orders with an Immediate or 
Cancel or Fill or Kill modifier are excluded). The total potential shares in orders that were available at the 
NBBO midpoint from midpoint peg orders on exchanges and ATSs was calculated each stock day by 
adding shares when midpoint peg orders were received by an exchange or ATS and subtracting shares in 
these orders that were canceled or traded. Shares were also subtracted from the total when a wholesaler 
internalized an individual investor marketable order at a price worse than the NBBO midpoint and shares 
were available at the midpoint on exchanges and ATSs that the order could have hypothetically executed 
against. This ensures that that analysis is not overestimating the available midpoint liquidity (i.e., it ensures 
that we do not estimate two individual investor 100 share orders could have executed against the same 
resting 100 share midpoint order). The analysis also kept track of the total amount of dollars of additional 
price improvement that individual investors would have received if their orders had hypothetically executed 
against the liquidity available at the NBBO midpoint instead of being internalized by the wholesaler. Note 
that this analysis might underestimate the total non-displayed liquidity available at the NBBO midpoint 
because it only looks at orders that pegged to the midpoint and not other orders, such as limit orders with a 
limit price equal to the NBBO midpoint. 
539
  As discussed in Table 20, percentages were computed at a stock-week level and then averaged across 
stock-weeks by weighting by the total dollar volume the wholesaler internalized during that stock-week.   

274 
 
non-displayed liquidity resting at the NBBO midpoint on exchanges and NMS Stock ATSs. 
Under the current market structure, this liquidity is not displayed, so wholesalers may not have 
been aware of this liquidity and able to execute the individual investor marketable orders against 
it. Currently, if wholesalers wanted to detect this hidden liquidity, they would have had to ping 
each individual exchange or NMS Stock ATS to see if midpoint liquidity was available on that 
venue.
540
  
 These results shed additional light on the availability of liquidity at the NBBO midpoint 
for a large share of individual investor orders that currently receive executions at less favorable 
prices than the NBBO midpoint and therefore could potentially execute at a price equal to the 
NBBO midpoint under qualified auctions. Under the Proposal, individual investor marketable 
orders submitted to qualified auctions might execute at the NBBO against this hidden liquidity, 
assuming the added transparency does not reduce the supply of midpoint liquidity. The qualified 
auction message would act as a coordination mechanism and would make the broker-dealers that 
handle the orders resting at the NBBO midpoint on exchanges and NMS Stock ATSs aware there 
was a segmented order they could trade against. These broker-dealers could cancel their 
midpoint orders resting on exchanges and NMS Stock ATSs and instead submit them as an 
auction response priced at the midpoint in the qualified auction.
541
  
Table 20 also estimates the additional dollar price improvement that these individual 
investor marketable orders would have received if they had executed against the available 
midpoint liquidity instead of being internalized. The total amount of additional price 
                                                
540
  Pinging for midpoint liquidity at multiple venues could increase the risk of information leakage or that 
prices may move, possibly resulting in some market participants canceling midpoint orders they posted. 
541
  If the midpoint liquidity is resting on the LOB of the open competition center running the qualified auction 
then it would be included in the qualified auction without the submitter having to cancel the order. 

275 
 
improvement that all of these individual investor orders would have received was about 51% of 
the total dollar price improvement provided by wholesalers to all of the individual investor 
marketable orders that they internalized (i.e. the marketable orders internalized at prices better or 
equal to the midpoint plus marketable orders internalized at prices worse than the midpoint). 
In addition, the results in Table 20 also indicate the availability of NBBO midpoint 
liquidity is only slightly lower for less liquid (non-S&P 500 stocks) as liquid (S&P500) stocks. 
That is, while about 57% of the shares in individual investor marketable orders in non-S&P500 
stocks internalized by wholesalers received executions at less favorable prices than the NBBO 
midpoint, there was nevertheless hidden liquidity available at the NBBO midpoint for about 68% 
of these non-S&P500 shares. Thus, the potential for NBBO midpoint execution for shares in 
non-S&P500 stocks from qualified auctions is similar to the overall market. Moreover, the 
potential additional price improvement that could have been gained if these individual investor 
orders had executed against this NBBO midpoint liquidity is almost 55% of the total price 
improvement provided by wholesalers in these stocks. In general, the potential for qualified 
auctions under the Proposal to act as a coordination mechanism and potentially create more 
opportunities for hidden liquidity resting at the NBBO midpoint to interact with segmented 
orders exists for both liquid and non-liquid stocks. 
  

276 
 
Table 20: Available Midpoint Liquidity When Wholesaler Internalizes a Retail Trade 
Stock Type Price Group 
Liquidity 
Bucket 
Wholesaler Pct Exec 
Shares Worse Than 
Midpoint 
Pct Shares MP 
Price 
Improvement 
Additional Dollar 
Price Improvement Pct 
All All  51.05% 
74.60% 51.05% 
SP500 All  48.41% 
72.32% 41.43% 
SP500 1) <$30  64.36% 
60.08% 50.00% 
SP500 2) $30-$100  47.82% 
60.36% 29.29% 
SP500 3) $100+  47.69% 
75.69% 43.27% 
NonSP500 All  57.45% 
68.10% 54.51% 
NonSP500 1) <$30 Low 73.30% 
49.52% 67.63% 
NonSP500 1) <$30 Medium 71.30% 
60.25% 82.85% 
NonSP500 1) <$30 High 66.77% 
52.18% 59.74% 
NonSP500 2) $30-$100 Low 63.60% 
80.69% 68.88% 
NonSP500 2) $30-$100 Medium 57.71% 
85.24% 61.80% 
NonSP500 2) $30-$100 High 50.24% 
71.79% 44.58% 
NonSP500 3) $100+ Low 61.62% 
84.32% 61.49% 
NonSP500 3) $100+ Medium 55.40% 
93.29% 55.96% 
NonSP500 3) $100+ High 47.15% 
90.99% 45.57% 
ETF All  49.93% 
86.06% 58.28% 
ETF 1) <$30 Low 66.58% 
39.75% 31.61% 
ETF 1) <$30 Medium 57.95% 
54.91% 38.35% 
ETF 1) <$30 High 62.24% 
78.47% 88.70% 
ETF 2) $30-$100 Low 61.01% 
62.00% 41.78% 
ETF 2) $30-$100 Medium 53.94% 
77.54% 46.85% 
ETF 2) $30-$100 High 49.87% 
84.09% 49.56% 
ETF 3) $100+ Low 52.45% 
72.28% 40.13% 
ETF 3) $100+ Medium 47.51% 
87.20% 45.35% 
ETF 3) $100+ High 46.93% 
90.28% 48.33% 
This table summarizes midpoint liquidity available on exchanges and ATSs during March 2022 when a 
wholesaler internalizes an individual investor marketable order less than $200,000 in an NMS common stock or 
ETF on a principal basis at a price less favorable than the NBBO midpoint (at the time of the wholesaler 
receives the order) from one of the 58 retail broker MPIDs in the CAT retail analysis. Stocks are broken out 
into buckets based on their security type, price, and liquidity. Stock type is based on whether a security is an 
ETF, or a common stock in the S&P 500 or Non-S&P 500. Price buckets are based on a stock’s weekly average 
VWAP price as estimated from TAQ.  Stocks within each security type-price bucket, except S&P 500 stocks, 
are sorted into three equal liquidity buckets based on the stock’s total share trading volume during the week 
estimated using TAQ data (see supra Table 9 for additional details on the bucket definitions). See supra Table 7 
for additional details on the sample and CAT analysis of wholesaler executions of the orders of individual 
investors.  
Wholesaler Pct Exec Shares Worse Than Midpoint is the average percentage of individual investor shares that 
wholesalers executed on a principal basis at a price less favorable than the NBBO midpoint (measured at the 
time the wholesaler receives the order). Pct Shares MP Price Improvement is the average percentage of shares 
that the wholesaler executed at a price less favorable than the NBBO midpoint that could have executed at a 
better price against resting liquidity available at the NBBO midpoint on exchanges and NMS Stock ATSs at the 
time the wholesaler executed the order. Additional Dollar Price Improvement Pct is ratio of the total additional 

277 
 
dollars of price improvement of the sample period that individual investors whose orders were executed at a 
price less favorable than midpoint would have received if their orders would have executed against available 
midpoint liquidity, divided by the total dollars in price improvement (measured relative the NBB or NBO at the 
time of order receipt) that wholesalers provided over the sample period when they internalized individual 
investor orders (i.e. the total price improvement for orders wholesalers internalized at prices less favorable than 
the midpoint plus the total price improvement for orders wholesalers internalized at prices more favorable than 
the midpoint). 
Midpoint liquidity is measured based on resting midpoint peg orders on exchanges and NMS Stock ATSs 
during normal market hours identified from CAT data. Midpoint peg orders with an Immediate or Cancel or 
Fill or Kill modifier are excluded. The total potential shares in orders that were available at midpoint on 
exchanges and ATSs at a point in time were calculated keeping a running total each stock day by adding shares 
when midpoint peg orders were received by an exchange or NMS Stock ATS and subtracting shares when 
shares in these midpoint peg orders were canceled or traded. When a wholesaler executes an order at a price 
less favorable than the NBBO midpoint (at the time the wholesaler receives the order), then the executed shares 
are compared to the available resting liquidity at the NBBO midpoint. If the NBBO midpoint at the time the 
order is executed would provide price improvement over the price the wholesaler would have executed the 
order at, then the shares executed by the wholesaler are subtracted from the total resting shares available at the 
NBBO midpoint, up to the lesser of the number of shares executed by the wholesaler or the total resting shares 
available (i.e. the total resting shares will not drop below zero). These are counted as the total shares that would 
have received additional price improvement at the midpoint. This methodology ensures that that analysis is not 
overestimating the available midpoint liquidity (i.e. it ensures that we do not estimate two individual investor 
100 share orders could have executed against the same resting 100 share midpoint order). NBBO midpoints for 
both time of order receipt and time of execution are estimated from the consolidated market data feed. 
The additional dollars of price improvement individual investors whose orders were executed at a price less 
favorable than the midpoint would have received if their orders would have executed against available midpoint 
liquidity was calculated as the difference between the price the wholesaler executed the order at and the NBBO 
midpoint at the time the wholesaler executed the order (i.e., executed price – NBBO midpoint at the time of 
execution for a marketable buy order and midpoint – executed price for a marketable sell order ) times the 
number of shares that would have received the additional price improvement.  
Weighted averages are calculated for the variables Wholesaler Pct Exec Shares Worse Than Midpoint and Pct 
Shares MP Price Improvement using the following methodology. Percentages based on share volume are 
calculate for each stock-week (e.g., total shares executed at a price worse than the midpoint during a stock-
week divided by the total shares of individual investor marketable orders executed by a wholesaler in a 
principal capacity during the stock-week). Weighted averages are then calculated for each stock-type-price-
liquidity bucket by averaging these stock-week percentages over the month by weighting each stock-week by 
the total dollar trade volume internalized by the wholesaler during the stock-week (i.e., using the stock’s total 
dollar trading volume internalized by the wholesaler as the weight when averaging the stock-week percentage 
values).  
The Additional Dollar Price Improvement Pct is not weighted and is calculated as the ratio of the month’s total 
additional dollar price improvement orders executed at a price less favorable than the NBBO would have 
received if their orders would have executed against available midpoint liquidity, divided by the month’s total 
dollars in price improvement (measured relative the NBBO at the time of order receipt) that wholesalers 
provided when they executed individual investor orders (i.e. the total price improvement for orders wholesalers 
internalized at prices less favorable than the midpoint plus the total price improvement for orders wholesalers 
internalized at prices more favorable than the midpoint). 
 

278 
 
 
In addition to benefiting individual investors, the Proposal would improve order 
execution quality for other key market participants that compete to supply liquidity to individual 
investor orders, including institutional investors. For example, individual investor order flow that 
is currently accessed indirectly by institutional investors through wholesaler SDPs could be 
accessed directly at better prices relative to the prices charged by SDPs.
542
 As stated above, in 
Q1 2022, SDPs associated with the two highest-volume wholesalers accounted for around 3% of 
the consolidated NMS stocks volume, while the volume of shares handled by these two 
wholesalers accounted for 15.9% of consolidated share volume in NMS stocks as of Q1 2022.
543
 
If institutional and individual investors could directly interact via qualified auctions, then these 
orders could potentially receive better execution quality.
544
 
 
In addition to increasing price improvement and interaction among market participants, 
the Proposal would improve pre-trade transparency and price efficiency. Currently, because most 
individual investor orders are internalized by wholesalers, pre-trade transparency related to these 
orders is limited, and has very likely declined over time as a result of the increasing share of 
                                                
542
  See supra section VII.B.3 for further discussions regarding how institutional investors indirectly interact 
with individual investor orders through wholesaler SDPs. 
543
  See supra note 416 and corresponding discussion. 
544
  The direct interaction between individual and institutional investors in qualified auctions would allow for 
price improvement for both groups of investors, the sum of which is currently received by the wholesaler 
serving as the intermediary via its SDP. Thus, the gains to individual and institutional investors would be 
an economic transfer from the wholesaler. The impact of the Proposal on the costs to wholesalers is 
discussed in infra section VII.C.2.c. 

279 
 
trading volume that is executed off-exchange.
545
 Moreover, the fact that some of the same 
market-makers have a large presence both on and off exchange implies a skewed information 
advantage, accruing to a subset of market makers. This subjects on-exchange liquidity providers, 
which may include individual investors, to greater adverse selection, which may have manifested 
in spreads wider than they would be otherwise, as well as lower depth.
546
  
As a result of the Proposal, price efficiency would be improved as a result of the 
dissemination of qualified auction messages, which would increase transparency regarding the 
trading interest of individual investors. Because qualified auction messages would be included in 
consolidated market data
547
, they would not only promote competition by soliciting potential 
auction responses from a wide spectrum of market participants, but would also enhance the pre-
trade transparency of marketable orders of individual investors, which may lead to improvements 
in liquidity and price efficiency.
548
 As market participants would be better able to observe the 
trading interest of individual investors using consolidated market data, this would also allow 
them to better able to observe institutional trades.
549
 The overall increase in market participants’ 
                                                
545
  See supra notes 374 and 375 and accompanying text. Additionally, market participants have stated that 
liquidity displayed at or near the NBBO on exchanges has declined over time. See supra note 376 and 
accompanying text. 
546
  See supra section VII.B.1 for further discussion of the increase in off-exchange trading volume. 
547
  The MDI Rules required auction messages to be included in consolidated market data. See supra section 
III.B.1. NMS Stock ATSs operating qualified auctions would need to disseminate qualified auction 
messages via FINRA’s ADF. 
548
  Evidence shows that increasing pre-trade transparency can improve liquidity and price efficiency. See, e.g., 
Ekkehart Boehmer, Gideon Saar & Lei Yu, Lifting the Veil: An Analysis of Pre-Trade Transparency at the 
NYSE, 60 J. Fin. 783 (2005). However, some evidence suggests that extreme changes, beyond what is 
proposed here, can have detrimental effects on market quality. See Ananth Madhavan, David Porter & 
Daniel Weaver, Should Securities Markets Be Transparent?, 8 J. Fin. Mkt. 265 (2005).  
549
  For example, in the most extreme case, if virtually all individual investor orders are routed to and executed 
in qualified auctions, market participants would be able to identify nearly all other off-exchange 
transactions as institutional trades. This may result in additional costs to institutional investors related to 
information leakage; see infra section VII.C.2.f for a detailed discussion. 

280 
 
ability to observe information in trades reported in consolidated market data would lessen the 
highly skewed information advantage of large market makers on and off-exchange, reducing 
adverse selection and potentially improving market quality.
550
 These improvements would also 
occur should order flow be routed directly to the limit order book rather than going to an auction. 
They would be reduced to the extent that orders would be internalized at midpoint or better by 
wholesalers rather than routed to an exchange. 
Additionally, the execution of more individual investor orders on exchanges would 
increase post-trade transparency because it would be easier to identify which transactions 
belonged to individual investors and on which venue they were executed.
551
 The effects of post-
trade transparency would be similar in direction to that of pre-trade transparency, though perhaps 
smaller, as the incremental difference in the transparency is less. Overall, the proposal will likely 
lead to increased trading on national market exchanges and on alternative trading systems 
satisfying the specified conditions. Evidence suggests that an increase in trading on lit venues 
could potentially increase information efficiency.
552
 
 
The Commission recognizes that the Proposal would result in initial and ongoing 
compliance costs, as well as other costs to market participants. The Commission quantifies these 
costs where possible and provides qualitative discussion when quantifying costs is not feasible. 
                                                
550
  The advantage would be lessened though not completely eliminated, provided that retail brokers route 
initially through wholesalers rather than directly to exchanges. 
551
  Qualified auction messages (which would be disseminated in consolidated market data) could be matched 
with trade execution reports in order to identify which trades belonged to retail orders. Currently, SIP trade 
reports for trades executed on exchanges identify the venue on which the trade occurred. Trade reports for 
trades executed off-exchange do not.  
552
  See, e.g., Carole Comerton-Forde & Tālis J.Putniņš, Dark trading and price discovery, 118 J. Fin. Econ. 70 
(2015), who find that high levels of dark trading can impede price discovery. 

281 
 
 
Market participants would incur various initial and ongoing costs in order to comply with 
Proposed Rule 615. The Commission estimates in Table 21 that total initial PRA compliance 
costs would be approximately $48.28 million while ongoing annual PRA compliance costs 
would be approximately $1.99 million.
553
 Compliance costs would vary across market 
participants, including broker-dealers, SROs (including national securities exchanges and 
FINRA), and NMS Stock ATSs. 
  
                                                
553
  Aggregate PRA compliance costs are calculated by summing up PRA compliance costs of various 
components of Proposed Rule 615, which are detailed below and also discussed in detail above in supra 
section VI.D. 

282 
 
Table 21: Summary of PRA Compliance Costs 
Element Participants 
Implementation 
Costs per Entity 
Ongoing 
Costs per 
Entity 
Total 
Implementation 
Costs 
Total Ongoing 
Costs 
Administer & regulate 
auctions –  
Rule 615 (c)(1) 
10 $79,000 $119,000 $790,000 $1,190,000  
P&P - Identification of 
segmented orders –  
Rule 615 (e)(1), (e)(2) 
157 $34,000 $4,500 
$5,301,000  
$703,000 
Marking segmented 
orders: In-house – 
Rule 615 (e)(2) 
52 $95,500   $4,970,000   
Marking segmented 
orders: 3
rd
 party – 
Rule 615 (e)(2) 
105 
 
$53,000  
 
 
$5,600,000  
 
 
One-time technology 
project costs to add 
“segmented order” 
and certification 
marks to existing 
marking systems –  
Rule 615 (e)(2), (f)(1) 
182 
170,000 
 30,940,000  
Certification that BD 
identity will not be 
disclosed –  
Rule 615(c)(1)(iii), 
(e)(3) 
 
20 $33,800 $4,500 $675,000 $90,000 
ATS’s excluding 
subscribers –  
Rule 615 (d)(1) 
3 $3,100 $2,700 $9,300 $8,000 
Total 176   $48.29 million $1.99 million 
 
These estimated compliance costs can be disaggregated into several components. First, as 
part of the requirement to provide qualified auction messages, specified in Proposed Rule 615 
(c)(1), national securities exchanges, FINRA and NMS Stock ATSs would have to utilize various 

283 
 
personnel (legal, compliance, information technology, and business operations) to prepare and 
implement a system to collect and provide the information necessary to generate auction 
messages for dissemination in consolidated market data. In addition to the 6 national securities 
exchanges and 3 NMS stock ATSs that the Commission believes would participate in qualified 
auctions,
554
 FINRA would also disseminate qualified auction data and would therefore incur 
these compliance costs. Thus, each of these 10 entities (6 exchanges, 3 ATSs, and FINRA), 
would each face an estimated initial compliance costs of $79,000, with total cost calculated at 
$790,000.
555
 Furthermore, each of these entities would have to collect and provide auction 
messages on an ongoing basis, which the Commission estimates would be $119,000 per entity 
annually, totaling $1.19 million (see Table 21 above.)
556
 
Originating broker-dealers would face various compliance costs, including identifying 
and marking segmented orders, as specified in paragraphs (e)(1) and (e)(2) of Proposed Rule 
615. This would involve utilizing in-house and outside counsel to update and review existing 
policies and procedures, as well as an in-house General Counsel and a Chief Compliance Officer 
to review and approve updated policies and procedures. An outside programmer would also be 
needed to modify existing technology and coordinate with the broker-dealer’s compliance 
manager.
 
The Commission estimates that the initial costs to the 157 originating broker-dealers 
would be approximately $34,000 per broker and $5.3 million for the industry.
557
 In addition, 
these originating brokers would need to provide ongoing annual reviews and update existing 
                                                
554
  See supra section IV.B.2 and section VII.C.1.a for further discussion on the incentives for exchanges and 
ATSs to offer qualified auctions. 
555
  See supra notes 290 and 296 for a detailed description of these estimated costs. 
556
  See supra notes 291-292; 295; 297 for a detailed description of these estimated costs. 
557
  See supra notes 301-303 for a detailed description of these estimated costs. 

284 
 
policies, which Commission estimates would cost about $4,500 per broker-dealer and an 
aggregate cost of $703,000.
558
  
The 157 originating brokers would also incur the cost of adding a “segmented order” and 
certification mark to their existing marking systems, as specified in Rule 615(e)(2). The 
Commission predicts that approximately one third of the 157 originating brokers (i.e., 52 firms) 
would choose to perform the necessary systems modifications to identify and mark segmented 
orders with in-house staff, which would cost an estimated $95,500 per firm and $4.97 million for 
all 52 firms. Commission estimates that two-thirds of the originating brokers (i.e., 105 firms) 
would hire third-party service providers to assist with these system modifications, which is 
predicted to cost $53,000 per broker and $5.6 million for all 105 firms.
559
  
The Commission also estimates that there would be an initial one-time technology project 
costs for originating brokers to add the “segmented order” and certification marks to the existing 
marking systems of all 157 originating brokers as well as 25 routing brokers (for a total of 182 
brokers-dealers), in order to comply with paragraph (e)(2) of Proposed Rule 615, and the initial 
one-time cost for routing broker-dealers to mark segmented orders to comply with paragraph 
(f)(1) of Proposed Rule 615 and also mark orders to communicate certifications when applicable. 
These costs are estimated to be $170,000 per broker-dealer, for an aggregate total cost of $30.94 
million.
560
 
The ongoing task of marking segmented orders would not require new resources, but 
instead would utilize broker-dealers’ existing marking systems. Therefore, the ongoing task of 
                                                
558
  See supra notes 304-305 for a detailed description of these estimated costs. 
559
  See supra notes 312-313 for a detailed description of these estimated costs. 
560
  See supra notes 314-315 for a detailed description of these estimated costs. 

285 
 
marking segmented orders would not cause broker-dealers to incur new monetary costs related to 
updating their systems to market orders (and is therefore not reported in Table 21 above).
561
 
The Commission estimates that 20 originating broker-dealers would certify and not make 
the mandatory identity disclosure, as specified in paragraph (c)(1) of Proposed Rule 615.
562
 
Obtaining this certification would involve utilizing in-house and outside counsel to update and 
review existing policies and procedures, as well as an in-house General Counsel and a Chief 
Compliance Office to review and approve updated policies and procedures. Outside counsel 
would also be needed to review the updated policies and procedures. These initial compliance 
costs are estimated at $33,800 per broker, totaling $675,000 for all 20 firms.
563
 
These 20 broker-dealers would also incur ongoing costs to review and update existing 
policies and procedures, estimated at $4,500 per broker-dealer and $90,000 for all 20 firms.
564
 
The various compliance costs involved in obtaining and maintaining originating broker 
certification (that it has established, maintained, and enforced written policies and procedures 
designed to assure that its identity will not be disclosed), as specified in paragraphs (c)(1)(iii) and 
(e)(3) of Proposed Rule 615, are summarized above in Table 21. It is uncertain how many 
broker-dealers would choose to exercise this option. If fewer or greater than (the Commission’s 
estimate of) 20 firms seek certification to withhold their identity as the originating broker during 
a qualified auction, aggregate compliance costs would be different from those found in Table 21. 
                                                
561
  The Commission estimates that around 2.1 billion orders would need to be marked annually, and calculates 
that this would require between approximately 24,000 and 290,000 total hours, based on its estimates of the 
duration of time used to mark each order. See supra notes 316-320 and corresponding discussion. 
562
  See supra note 288 and corresponding discussion. 
563
  See supra notes 322-326 for a detailed description of these estimated costs. 
564
  See supra notes 327-329 for a detailed description of these estimated costs. 

286 
 
NMS Stock ATSs that participate in qualified auctions would incur costs in order to 
comply with the requirements regarding ATS policies and procedures for excluding subscribers, 
as specified in proposed Rule 615(d)(1). Compliance costs would initially involve reviewing 
existing policies and procedures for consistency with the proposed rule, making modifications as 
appropriate, and putting the policies and procedures in writing. These initial costs, which the 
Commission expects would apply to 3 NMS Stock ATSs, are predicted to cost $3,100 per firm, 
and $9,300 for all 3 firms.
565
 In addition, these ATSs would face the ongoing cost of reviewing 
and updating the relevant existing policies and procedures, estimated at $2,700 per firm and 
$8,000 for all 3 firms (see Table 21 above). Note that these estimated compliance costs are based 
on the Commission’s assumption that at least some ATSs would operate qualified auctions. As 
discussed above, ATSs would have to make significant adjustments to their business models 
(especially with regards to segmenting customer orders and displaying quotes) in order to meet 
the requirements to operate a qualified auction.
566
 
 It should be emphasized that the estimated compliance costs described above and 
summarized in Table 21 are the Commission’s best estimate for the required technological, 
operational, and legal services resources that would be utilized in the initiation and ongoing 
operation of qualified auctions.  
 
i. Greater Variation in Execution Quality 
The Commission is cognizant of concerns regarding the possibility of a decline in 
execution quality due to the implementation of qualified auctions. This includes the possibility 
                                                
565
  See supra notes 334-335 for a detailed description of these estimated costs. 
566
  See discussion in supra section VII.C.1.a. 

287 
 
that a qualified auction host could decide not to host an auction for a particular stock.
567
 
However, if an order fails to execute in one auction, it could be directed quickly to other 
auctions,
568
 and/or the wholesaler would have the option to internalize the order at the same or 
better price at which it was exposed in the first auction. Although it is also possible that the 
quotes may move against the order during this time and the wholesaler would have to route it to 
an exchange LOB or expose the order in another qualified auction before it could execute. Also, 
wholesalers would have the option to internalize the trade without exposing it in an auction if the 
wholesaler were willing to execute the order at midpoint or better. More generally, however, the 
Commission believes that at least one open competition trading center would be incentivized to 
operate qualified auctions and serve as the qualified auction host for every segmented order in 
order to increase its volume/market share relative to other trading venues, as well as to 
potentially earn revenue from any net capture between the fees and rebates the qualified auction 
might charge.
569
 
An additional concern is that there could be a general lack of interest from liquidity 
suppliers to participate in a qualified auction. However, in cases where there was insufficient 
competition from liquidity providers, then the majority of individual investor orders could 
simply be internalized by wholesalers, similar to the current market, though perhaps at inferior 
prices compared to what they might have received under the current market structure. Moreover, 
while this occurrence might occur for any individual order, it would be extremely unlikely at the 
                                                
567
  Qualified auction hosts would have the discretion to determine for which stocks they would run auctions. 
568
  An additional risk is that there could be price slippage when the order is routed to a different qualified 
auction.  
569
  See supra notes 503-507 and accompanying discussions for estimates of net capture rates for fees and 
rebates related to qualified auctions. 

288 
 
market level, because marketable order flow of individual investors has lower adverse selection 
risk than order flow routed to exchanges and most liquidity suppliers would profit by trading 
with it if the predicted realized spread was large enough.
570
 
A related concern regarding the functioning of qualified auctions is the possibility of 
slippage costs. More specifically, there is the potential that the NBBO could change while the 
qualified auction was in process. Since Proposed Rule 615 would require an auction message to 
be disseminated once an individual investor order is brought to a qualified auction, the concern is 
that these messages would trigger a response in quoted prices. 
The Commission performed an empirical analysis to estimate this risk by observing the 
likelihood that that the NBBO spread moves (i.e., the “fading probability”) as the time lag 
increases (in milliseconds) from the internalization of an individual investor order in comparison 
to the fade probability after NBBO quote movements.
571
 Results from this analysis
572
 indicate 
                                                
570
  The Commission is uncertain how liquidity would be impacted by increased volatility within the context of 
qualified auctions. The risk that individual investors may receive worse prices compared to the current 
market structure may not be significantly elevated because wholesalers could still internalize the trades if 
they cleared the auctions or route them to the LOB for execution. 
571
  The Commission’s “fade analysis” estimates the possibility of adverse price movements to individual 
investors. It’s also possible to consider the likelihood of adverse price movements (and the resulting 
increase in trading costs) from the perspective of the bid winner. However, bidders would be much less 
exposed to risk of fade because their connectivity capacities would allow them to cancel bids should they 
expect adverse price movements. Individual investors, however, would have no control over where their 
orders are executed: auction vs. internally. Therefore, the Commission’s focus is on the risk of adverse 
price movements from the perspective of individual investors. 
572
  The Commission’s “fade analysis” uses an algorithm from Boehmer et al. (2021) to identify retail trades. A 
recent paper by Barber et al. (2022) finds that the algorithm correctly identifies only 35% of trades as retail. 
However, plausibly a significant fraction of the retail trades unidentified by the algorithm reflects orders 
executed on a risk-less principal basis, i.e., executions that would not be relevant to the order flow targeted 
by the Proposal. In addition, the internalized retail trades missed by the algorithm are likely idiosyncratic 
across buy and sell orders. Therefore, aggregation of the data, which was performed as part of the 
Commission fade analysis, would likely have minimized any directional bias that these errors would have 
otherwise caused. Therefore, empirical results regarding the estimated risk of adverse pricing movements 
are likely to still be consistent despite limitations in identifying retail trades. See Ekkehart Boehmer et al., 
Tracking Retail Activity, 76 J. Fin. 2249 (2021), and Brad M. Barber et al., A (Sub)penny For Your 
Thoughts: Tracking Retail Investor Activity in TAQ (last revised Sept. 30, 2022) (unpublished manuscript), 
available at https://ssrn.com/abstract=4202874 (retrieved from Elsevier database). 

289 
 
that the probability of the NBBO quotes adversely moving after the execution of an individual 
investor order range from 1.8% at 25 milliseconds after an internalized trade, to 2.8% at 100 
milliseconds—an increase of 1 percentage point. Extending the duration to 300 milliseconds, the 
maximum time of the auction as proposed, increases the likelihood of adverse fading to 4.6%.
573
 
Auction announcements would differ from SIP trade messages for trades executed off-
exchange, which could potentially result in different quote movements compared to those 
observed in the analysis. Auction announcements would represent announcements of pre-trade 
interest as opposed to SIP trade messages being announcements of post-trade interest, which 
could lead to different responses by the liquidity suppliers setting the NBBO.
574
 Additionally, 
auction announcements would disclose more information than SIP messages for off-exchange 
trades, including, among other things, the direction of the segmented order, the venue it was on, 
and, potentially, the identity of the originating broker.
575
 Disclosure of this information in 
qualified auctions, including the originating broker as mandated by the Proposal (absent a 
certification from the originating broker that its identity not be disclosed), would provide 
potential bidders with more information about an order than is currently provided by the SIP 
trade message, which in turn could lead to increased variation in the adverse fade that could 
follow auction announcements. That is, adverse fade could be reduced when bidders learn that an 
order stems from an originating broker with relatively low adverse selection risk, while 
                                                
573
  Moreover, the substantially lower fade probability of less than 5% following internalized investor trades 
relative to the cross-stock fade probability of more than 16% following a given quote update is consistent 
with low adverse selection costs of currently internalized individual investor orders 
574
  Although this difference may be limited given the lower adverse selection risk of segmented orders. 
575
  The SIP trade message would not reveal what venue the trade took place on, its direction (although it may 
be able to be estimated based on the transaction price), or whether the trade belonged to an individual 
investor vs another market participant (although, similar to this analysis, this information may be inferred 
based on if the trade executed at a sub-penny price).  

290 
 
announcements of orders from retail brokers with higher adverse selection risk could trigger 
greater adverse fade relative to a SIP trade announcement of an identical order. However, despite 
the likely increase in the variation of adverse fade, the average risk of adverse fade under 
qualified auctions may be similar to SIP trade announcements used to generate the estimates 
reported above. Overall, the results of the Commission’s fade analysis suggest that auction 
messages would result in minimal adverse movements in best quotes due to the low adverse 
selection risk of individual investors, but, for the reasons discussed above, there may be greater 
variability in the risk of adverse quote movements. Because auction messages would differ from 
SIP messages, there is uncertainty regarding their overall effects on the risk of adverse quote 
movements. 
Fade analysis only estimates the possibility that adverse price slippage will occur, not the 
magnitude of the adverse fade. Thus, it is not possible to directly compare the potential loss to 
individual investors due to adverse fading with the gains that could stem from qualified auctions, 
which the Commission estimates would range from 0.86 bps to 1.31 bps, or in dollar terms, 0.15 
to 0.47 cents per share.
576
 However, one way to possibly quantify the potential cost of fading is 
to consider the price impact of an auction that did not result in a bid, which might increase the 
probability that the NBBO would be worse after a 300 millisecond auction by (the fade 
analysis’s estimate of) 4.6%. If we assume the quote moved 1 cent, which the Commission 
believes is the most frequent movement over a short time span, then the (expected value of the) 
potential average higher transaction cost to the order would face could be 1 cent × 4.6% = 0.046 
cents—significantly smaller than the estimated 0.15-0.47 cent per share gain stemming from 
qualified auctions.  
                                                
576
  See supra section VII.C.1.b.  

291 
 
A similar analysis could be used to estimate that the adverse fade that would occur during 
the course of a successful auction, which would be a minimum of 100 milliseconds, with the 
current duration of wholesaler internalized executions, which have a median duration of 3.54 
milliseconds. In other words, even successful qualified auctions that result in execution after the 
minimal duration of time will be (100 milliseconds – 3.54 milliseconds) = 96.56 milliseconds 
slower than the median wholesaler execution. If we use the fade probability of 2.8% for 100 
milliseconds, then the (expected value of the) adverse fade cost of a successful auction relative to 
internalization, assuming 1 cent slippage, would be 1 cent x 2.8% = 0.028 cents. This estimated 
cost is significantly below the estimated 0.15-0.47 cent per share gain stemming from qualified 
auctions. However, this calculation relies on the assumption of the minimum length of a 
qualified auction (100 milliseconds) and the median duration of a wholesaler internalized order 
(3.54 milliseconds). This calculation would generate different results if we assumed longer 
auction lengths, which would increase the fade cost of the auction, and longer (or shorter) 
internalization execution times. Given that a number of auctions in the options market have a 
duration of 100 milliseconds,
577
 the Commission preliminarily believes that a majority of open 
competition trading centers may elect to choose an auction duration of 100 millisecond for their 
qualified auctions. Therefore, a significant share of auctions may be successfully concluded 
within the 100 millisecond minimum auction duration, although some orders could take longer to 
conclude, while other orders would likely fail to have a successful outcome. Overall, the 
Commission believes the Proposal would result in price improvement for individual investors, 
although it is possible that variation in price improvement and overall execution quality might 
increase. 
                                                
577
  See supra note 243 for further discussions of the duration of auctions in the options market.  

292 
 
Besides potentially greater volatility stemming from a failed auction, an additional cost 
for some orders may arise to the extent that lower execution quality for some orders currently 
subsidizes better execution quality for others. Table 10 shows that wholesalers execute 13.82% 
of orders at prices superior to midpoint for the investor.
578
 On average, unless the orders have 
systematically negative price impact, the wholesaler may not be earning a positive marginal 
profit on these executions.
579
 This could imply they currently subsidize the additional price 
improvement on these trades with marginal profits earned on other executions. To the extent this 
occurs, if wholesalers’ marginal profits decline under the Proposal, then customers could receive 
less price improvement and experience higher transaction costs on trades that are currently 
subsidized. However, on average, the Commission expects that execution quality for individual 
investor orders would likely improve under the Proposal.
580
 
The Commission recognizes that wholesalers may provide consistency with regard to the 
execution quality that they deliver to individual investor orders.
581
 There is the concern that the 
Proposal would undermine the wholesaler business model, which in turn could hinder the ability 
of wholesalers to continue to provide consistency in their execution services. The Commission 
believes, however, that while bidders in qualified auctions may not provide as much consistency 
as wholesalers, some orders could receive improved execution quality while others would 
                                                
578
  Table 10 indicates that wholesalers executed 46.05% of shares at midpoint or better and 32.23% of shares 
at midpoint. 
579
  For these statistics, the NBBO midpoint is measured at the time the wholesaler receives the order, so it is 
possible that quotes may have changed by the time the wholesaler executes the order. Therefore, it is 
possible that wholesalers execute some of these trades at prices worse than the NBBO midpoint at the time 
of execution, in which case the wholesaler could still earn a positive realized spread on these trades even if 
price impact measured against the NBBO midpoint at the time of execution was positive. 
580
  See supra section VII.C.1.b. 
581
  See discussion in supra section VII.B.2.b. 

293 
 
receive reduced execution quality (relative to wholesalers). Based on the competitive shortfall 
analysis presented in section VII.C.1.b above, the net result would likely be improved execution 
quality, but the standard deviation of this execution quality would likely increase. 
ii. Resumption of Commissions on NMS Stock Orders 
An additional concern is that if the Proposal results in a significant or complete loss of 
PFOF, then retail brokers would be forced to start charging commissions again for online NMS 
stock and ETF trades.
582
 There are several reasons that retail brokers would be unlikely to 
resume charging commissions for these orders. First, the majority of retail brokers receive 
relatively little or no PFOF, and yet they have nevertheless successfully managed to support 
commission-free trading through their other revenue-generating lines of business.
583
 In fact, 
several retail brokers, including some that do not accept PFOF, earned record revenues and 
profits after zero-commission trading was initiated.
584
 While most brokers had already reduced 
                                                
582
  Almost all retail brokers continue to charge a commission fee for human broker-assisted orders. 
583
  CAT analysis shows that PFOF brokers originated about 80% of the share volume and about 74% of dollar 
volume of individual investor marketable orders that were routed to wholesalers and executed (see Table 
14). The Commission notes that trading revenue for many discount brokers rose to record levels in 2020, 
shortly after these discount brokers dropped commissions to zero. It’s unclear how much of this increase 
was due to individual investors being incentivized by zero commissions and new trading options such as 
fractional share trading, and how much was due to COVID-related factors that made online trading more 
appealing, including a shift towards remote work and a rise in discretionary funds from government 
stimulus. See Maggie Fitzgerald & Kate Rooney, E-brokers Defy Odds by Recording Record Trading 
Revenue While Dropping Commissions to Zero, CNBC (Aug. 20, 2020), available at 
https://www.cnbc.com/2020/08/20/e-brokers-defy-odds-by-recording-record-trading-revenue-while-
dropping-commissions-to-zero.html. It’s also important to note that even brokers that do not accept PFOF 
experienced increased revenue and profits, despite adopting zero commissions. See Kenneth Corbin, 
Fidelity Posts 6th Straight Record Profit, Barrons (Mar. 9, 2022), available at 
https://www.barrons.com/advisor/articles/fidelity-earnings-2021-51646853970. However, the recent 
increase in individual investor trading volume did not result in the loss of order-by-order competition. 
Isolation of individual investor orders by wholesalers preceded the recent rise in trade volume and a 
subsequent decline in trade volume would not remove the rationale for the Proposal because individual 
investor orders will continue to comprise a substantial share of overall trade volume with the potential for 
improved execution quality if order-by-order competition is incorporated into this market.  
584
  Id. 

294 
 
commissions to under $10, there was still considerable concern that the zero commissions would 
lower profits. Despite these concerns, industry profit grew in 2020.
585
 
Moreover, the average PFOF payment that brokers receive on a 100 share order is 10-20 
cents.
586
 The PFOF for a 1000 share order is less than the commission fees previously charged 
by broker-dealers, which had generally been $5 or more.
587
 Thus, just as the loss of commission 
fees was not offset by the receipt of PFOF, the loss of PFOF might not necessitate the return of 
commission fees.
588
  
Additionally, to the extent that rebates paid for the routing of segmented orders to 
qualified auctions are passed through to retail brokers, it could reduce the likelihood that they 
resume charging commissions. The 5 mil cap on rebates that qualified auctions could pay for the 
submission of segmented orders under the Proposal is approximately 40% of the average 
combined PFOF rate paid by wholesalers for marketable orders as estimated in Table 2.
589
 If 
rebates paid by qualified auction hosts for the submission of segmented orders to the qualified 
                                                
585
  Pre-tax income of FINRA-registered broker-dealers rose from $43,943 million (2019) to $77,212 million 
(2020), an increase of 75.7%. This was substantially larger than the 2.7% increase in profits from 2018 to 
2019 ($42,780 million to $43,943 million). See FINRA, 2021 FINRA Industry Snapshot (2021), available 
at https://www.finra.org/sites/default/files/2022-02/21_0078.1_Industry_Snapshot_v10.pdf. However, it is 
possible that this increase in industry profits was transitory because of the spike in individual investor 
trading volume related to COVID. 
586
  See analysis in supra Table 17. 
587
  The average retail order size has declined since the shift to zero commission trading. See Pankaj K. Jain et 
al., Trading Volume Shares and Market Quality: Pre- and Post-Zero Commissions (last revised Sept. 16, 
2022) (unpublished manuscript), available at https://ssrn.com/abstract=3741470 (retrieved from Elsevier 
database). Assuming a PFOF rate of 20 cents per 100 shares, orders over 2500 shares would have lower per 
share revenue for the retail broker under a $5 fixed commission model than a PFOF model, while orders 
under 2500 shares would have higher per share revenue. 
588
  Commission fees were reduced to zero for online NMS stock trades, but not broker-assisted stock trades. 
Therefore, commission revenues have continued to exceed PFOF revenues for most PFOF firms, excluding 
the two PFOF firms that are online brokers and collect no commission revenue. 
589
  The 5 mil rebate would not be earned unless the order was routed to a qualified auction.  If the wholesaler 
chose instead to internalize the order at midpoint (and thereby be exempted from the auction), it would not 
earn the 5 mil rebate. 

295 
 
auction are passed through to retail brokers (assuming the retail broker does not route the 
segmented order to the qualified auction directly), then it could supplement the revenue they may 
lose from a reduction in PFOF.
590
 This could reduce the likelihood that retail brokers resume 
charging commissions.  
iii. Other Possible Costs to Investors 
The Commission is aware of other possible increases in trading costs stemming from the 
Proposal that might be experienced by some individual investors. For example, some individual 
investor orders that are currently eligible for RLP programs might not meet the proposed 
definition of segmented orders and might be excluded from the qualified auctions, which could 
reduce the price improvement that they currently receive via wholesalers or RPLs.
591
 
Furthermore, since the Proposal would require that the identity of the originating retail 
broker be disclosed (unless the originating broker certifies that the identity of the originating 
broker will not be disclosed to any person that potentially could participate in the qualified 
auction or otherwise trade with the segmented order
592
), orders from retail brokers that do not 
offer this certification and that are perceived to have higher adverse selection costs could end up 
receiving worse execution quality (i.e., less price improvement) than they currently experience, 
                                                
590
  Similarly, if a wholesaler routes a segmented order to a qualified auction and receives the rebate for the 
submission of a segmented order, the wholesaler may indirectly pass the rebate from the qualified auction 
through to the retail broker by using the rebate to subsidize PFOF payments it makes to the retail broker. 
See infra section VII.C.2.d.ii for further discussions on retail broker loss of PFOF revenue.  
591
  These orders could also be internalized by the wholesaler or executed on an ATS. 
592
  Proposed Rule 615 would require the identity of the originating broker to be disclosed unless it received 
certification that it has established, maintained, and enforced written policies and procedures designed to 
assure that its identity will not be disclosed, as specified in proposed Rule 615(e)(3). See supra section 
IV.B.4. The impact of this certification is uncertain. Non-disclosure would likely signal increased adverse 
selection risk of the order to market participants. However, results from supra section VII.B.5.b indicate 
that broker-dealers with higher adverse selection risk receive worse execution quality from wholesalers, so 
it is unclear whether orders stemming from certified broker-dealers will receive inferior execution quality 
relative to wholesaler internalization under the current market structure.  
 

296 
 
but only if wholesalers today do not already price in such risk when interacting with each retail 
broker. Customers of retail brokers that certify they will not disclose their identity could 
potentially receive worse execution quality if non-disclosure signals to market participants that 
the adverse selection risk of the order flow are high relative to orders from other broker-dealers. 
However, results from supra section VII.B.5.b indicate that broker-dealers with higher adverse 
selection risk receive worse execution quality from wholesalers, so it is unclear whether orders 
stemming from certifying broker-dealers would receive inferior execution quality relative to 
wholesaler internalization under the current market structure. 
Currently, wholesalers may choose not to internalize individual investor orders with high 
adverse selection risk but instead pass them on to other market makers, where they might be 
pooled with other individual investor orders. This pooling might cause these orders to receive 
greater price improvement from RLP programs or other hidden liquidity on exchanges or ATSs 
than they would otherwise receive if liquidity suppliers knew the identity of the originating 
broker. It is therefore possible that the Proposal’s requirement to disclose the identity of the 
originating broker (absent a certification from the originating broker that its identity not be 
disclosed) might result in such orders receiving reduced execution quality relative to what they 
currently receive to the extent they are pooled with orders from retail brokers with lower adverse 
selection risk. However, to the extent individual investor orders with high adverse selection risk 
orders are currently rerouted to exchange limit order books, where they may be effectively 
pooled with orders from other market participants with potentially higher adverse selection risk, 
then it is also possible that such orders could receive increased price improvement through 
execution in qualified auctions relative to what they receive in the current market structure. In 
sum, the more wholesalers already price in the adverse selection risk from each retail broker, the 

297 
 
less impactful is the proposed requirement that retail brokers’ identities be disclosed in the 
auction.  
 
The Commission recognizes that the Proposal would significantly impact the wholesaler 
market/business model. Wholesalers would have to compete directly with other liquidity 
providers on an order-by-order basis to provide price improvement to segmented orders in order 
to execute against such individual investor orders in qualified auctions.
593
 This would likely 
result in wholesalers filling fewer individual investor orders than they do currently and would 
likely pressure wholesalers to provide greater price improvement in order to remain competitive 
in providing liquidity to segmented orders.
594
 
The Commission recognizes that a wholesaler who exposes an order in a qualified 
auction would still be able to internalize the order if it submits the winning bid in the auction. 
However, because the order would be subject to competition from other liquidity suppliers, 
wholesalers would most likely not submit the winning bids in all of these auctions and thus 
would ultimately internalize a smaller share of order flow than they do now. Additionally, if a 
wholesaler decided to internalize an individual investor order at the midpoint or better, the order 
would not be required to be brought to a qualified auction. However, the E/Q ratios presented in 
Table 9 indicate that, on average, the execution prices of internalized individual investor orders 
are between 30% to 80% worse than the midpoint at the time of order receipt by the wholesaler. 
                                                
593
  A wholesaler would not have to compete on an order-by-order basis for an individual investor order if it 
internalized the individual investor order at a price equal to the midpoint or better, pursuant to Proposed 
Rule 615(b)(3). 
594
  As specified in section VII.B, the economic baseline against which we measure the economic effects of this 
proposal, including its potential effects on efficiency, competition, and capital formation, includes the 
changes to the current arrangements for consolidated market data in the MDI Rules; but those amendments 
have not been implemented.  

298 
 
As such, the Commission believes that it would be unlikely for wholesalers to internalize all 
segmented order flow priced at the NBBO midpoint or better, although a fraction of segmented 
orders are expected to be internalized at the NBBO midpoint, as they are today. 
Wholesalers could still end up trading with the majority of marketable orders of 
individual investors, although more of these orders might be executed on exchanges. Moreover, 
qualified auctions would provide wholesalers with an opportunity to access individual investor 
orders initially sent by retail brokers to other wholesalers. That is, individual investor orders 
brought by a given wholesaler to a qualified auction could be filled by another wholesaler that 
ends up submitting the winning bid to the qualified auction. More generally, wholesalers could 
have competitive advantages in supplying liquidity in these auctions due to their economies of 
scale and market making expertise. Therefore, while institutional investors would likely take 
advantage of the opportunity to directly access low-cost order flow provided by qualified 
auctions, it is nevertheless possible that wholesalers would still end up frequently winning 
qualified auctions and trading against a significant share of segmented orders. However, 
individual investor order flow might end up being more spread out across wholesalers rather than 
concentrated among two leading firms.
595
  
The Commission recognizes that retail brokers might consider routing their orders 
directly to a qualified auction instead of through wholesalers, especially if wholesalers 
discontinue offering PFOF.
596
 Furthermore, retail brokers could also route orders directly to a 
national securities exchange, which could result in access fees but also exchange rebate 
                                                
595
  See supra section VII.B.1. 
596
  The Proposal would allow retail brokers to route customer orders directly to a qualified auction with a 
specified limit price (such that they would not be bidding on the order). See supra section IV.A. 

299 
 
revenue.
597
 While the Commission is unable to quantify the net effect of these factors on the 
overall routing decisions of retail brokers, it is likely that the overall share of individual investor 
order flow initially routed to wholesalers would decrease, while the share initially routed to 
exchanges and ATSs operating qualified auctions would increase. 
The predicted decline in wholesaler profit margins from internalization might force 
wholesalers to reduce or cease paying PFOF, which in turn, would remove a key incentive for 
some broker-dealers to route to wholesalers. PFOF brokers route 97-98% of their market orders 
to wholesalers, while non-PFOF brokers route around 71-72% of their market orders to 
wholesalers.
598
 PFOF brokers could reduce their dependence on wholesalers to usage rates 
similar to non-PFOF brokers if PFOF ceased.  
Furthermore, the decline in wholesaler revenue and profit could cause wholesalers to start 
charging retail brokers for the order handling services that they provide. This could increase 
competition in the market for exchange execution services and cause wholesalers to lose market 
share against other providers of routing and execution services. Alternatively, wholesalers might 
try to preserve their share in order-handling services by continuing to not charge for their routing 
and execution services to retail brokers (and thereby earn lower profit margins), especially if 
handling marketable order flow provides additional benefits, either in the qualified auctions or 
internalized individual investor orders at the midpoint.
599
 The Commission is unable to quantify 
                                                
597
  Broker-dealers would always have the option to direct their orders to open competition trading centers or 
national securities exchanges instead of qualified auctions under the Proposal. Unlike qualified auctions, 
which would have auction fee and rebate caps of 5 mils (for orders valued at $1.00 or greater per share), 
national securities exchanges would continue to be able to charge tiered fees and rebate revenue, consistent 
with the requirements of Section 19(b) and Rule 19b-4. 
598
  See analysis in supra Table 4. 
599
  Even if wholesalers do not internalize individual investor orders, there might still be informational value 
from handling individual investor order flow. Wholesalers could be incentivized to offer free order routing 
to retail brokers in order to continue receiving this information, which would include the identity of the 

300 
 
the likelihood that wholesalers would continue to not directly charge retail brokers to route and 
execute their orders, but believes that it is possible that the majority of wholesalers would still 
not charge retail brokers for order-handling services.  
The Commission also recognizes that a decline in wholesaler market share would not 
only reduce wholesaler profits but might have spillover effects on wholesaler costs. For example, 
a reduction in the volume of individual investor order flow internalized by wholesalers could 
increase wholesaler inventory risk, which in turn could cause wholesalers to reduce the liquidity 
they supply as exchange market makers or to institutional investors via SDPs.  
 
i. Potential Initiation of Order Handling Fees by 
Wholesalers 
Currently, wholesalers do not charge retail brokers for routing and execution services, 
and pay some retail brokers PFOF for the right to provide these services. If the implementation 
of qualified auctions results in a significant loss of wholesaler profits, wholesalers might have to 
begin charging for routing and execution services. If wholesalers begin charging a fee for routing 
services, retail brokers would have to absorb this cost and earn lower profits and/or pass on a 
share of this cost to their customers. Retail brokers could also respond to the initiation of 
                                                
originating broker, the stock being traded and its order size, direction of the trade, and any handling 
instructions that may have been relayed to the broker, as well as the limit price if it’s a limit order. All of 
this information could help the wholesaler assess the direction of the market. In addition, the wholesaler 
could choose to internalize the order at midpoint (an allowable exception to qualified auctions), which 
would provide additional information on the direction of order flow that other market participants would 
not have since there would be no auction message in this case. Besides receiving a possible informational 
advantage of having first look at individual investor orders, wholesalers could also receive rebate revenue 
for submitting the order to a qualified auction as well as SIP revenue, although the Commission expects the 
rebate to be under 5 mils in order to be less than the 5 mil auction fee cap. See supra section IV.C.4 for a 
discussion of fees and rebates. Finally, wholesalers could choose to internalize the order if it was exposed 
in a qualified auction but did not execute. 

301 
 
wholesalers routing fees by paying the compliance costs necessary to serve as an originating 
broker, or instead pay fees to brokers that are able to route directly to qualified auctions.  
Retail brokers that certify that their identity would not be subject to the proposed 
disclosure requirement would not only face explicit costs for this certification (as discussed in 
supra section VI.B.3) but also would either have to route the order to the qualified auction 
themselves or use a routing service that wouldn’t trade with the orders, as mandated by the 
Proposal. If instead the broker-dealer used a wholesaler to route its order, the wholesaler would 
have to agree not to trade with the order (as mandated by the Proposal). In response to this 
restriction, the wholesaler may offer less PFOF (if it was currently receiving PFOF from the 
wholesaler) or potentially even charge a fee for handling the order.  
ii. Loss of PFOF Revenue  
The Commission recognizes that the implementation of qualified auctions, as mandated 
by the Proposal, could lead to a significant decline or perhaps disappearance of PFOF in the 
markets for NMS stocks. PFOF amounted to $235 million in Q1 2022 but was received almost 
entirely (93.8%) by four firms.
600
 One concern is that the loss of PFOF would cause PFOF 
brokers, and potentially other discount brokers, to resume charging commissions for online NMS 
stock trades.
601
 Just as PFOF brokers led discount brokers into zero-commission trading in 2019, 
it is possible they too could lead discount brokers back to charging commissions if they stopped 
receiving PFOF. 
 The Commission is unable to quantify the risk that some discount brokers would resume 
charging commissions on NMS stock and ETF trades, but there are a number of factors that 
                                                
600
  See analysis in supra Table 16 and corresponding discussion. 
601
  See supra section VII.C.2.b.ii for a discussion. 

302 
 
might make this risk low. First, the majority of PFOF received by retail brokers comes from 
transactions in the options market.
602
 The Proposal would not have a significant effect on the 
PFOF brokers receive from options transactions because it applies only to transactions in NMS 
stocks.
603
 Additionally, wholesalers may also continue paying retail brokers for segmented non-
marketable limit orders in NMS stocks, which may not need to be exposed in qualified auctions 
under the Proposal if their limit price is at the midpoint or a more favorable price. Therefore, to 
the extent that retail brokers do rely on PFOF, they might be able to retain the majority of the 
PFOF revenue they currently receive.  
Second, retail brokers might be able to expand existing revenue lines or develop other 
lines of business to compensate for the loss of PFOF revenue from NMS stock transactions. This 
includes the possibility of increasing revenue from margin interest and securities lending, which 
PFOF brokers currently utilize more heavily than the average broker-dealer.
604
 Moreover, the 
retail broker industry did not experience a drop in profits following the end of commissions.
605
 
This includes non-PFOF brokers, who did not choose to make up for lost commission revenue by 
charging wholesalers PFOF. The ability to maintain or increase profits stemmed in part from the 
sudden increase in customer accounts, due to, among other factors, increasingly accessible online 
trading platforms and the initiation of fractional share trading.
606
 Fractional share trading began 
                                                
602
  See supra note 586. 
603
  There are key differences between the options market and the market for NMS stocks; see supra note 235 
for further discussion. Proposed Rule 615 is designed to achieve policy objectives that are particular to 
mandatory auctions in NMS stocks. 
604
  See discussion in supra section VII.B.6.b. 
605
  See supra note 505 and corresponding discussion. 
606
  After falling during the 2016-2019 period from $229.2 billion to $197.8 billion, the average daily value of 
executions rose in 2020 to $312 billion. See ‘Order Audit Trail System (OATS) Activity – Daily Average 
OATS Events, 2016–2020’, available at https://www.finra.org/sites/default/files/2022-
02/21_0078.1_Industry_Snapshot_v10.pdf. Fractional share trading allows individual investors to trade and 
enter orders for fractional shares of a security, e.g., an individual investor could submit an order to buy 0.2 

303 
 
with a single broker-dealer in late 2019, but has grown dramatically since that time, with an 
increasing number of broker-dealers offering this functionality.
607
 Thus, just as retail brokers 
adjusted to the loss of commission revenue, they could also adjust to the loss of PFOF revenue. 
Third, to the extent that rebates paid on segmented orders routed to qualified auctions are 
passed through to retail brokers, it could supplement the revenue they may lose from a reduction 
in PFOF.
608
 The 5 mil cap on rebates that qualified auctions could pay for the submission of 
segmented orders under the Proposal is approximately 40% of the average combined PFOF rate 
paid by wholesalers for marketable orders as estimated in Table 2. 
Furthermore, there is reason to believe that adjustment to the loss of PFOF would be 
much more manageable for the retail broker industry than the loss of commissions from online 
NMS stock and ETF orders. The average PFOF payment that brokers receive on a 100 share 
                                                
shares of a stock. Fractional share orders often arise from retail brokers allowing individual investors to 
submit orders for a fixed dollar value. It is the Commission’s understanding that retail or clearing brokers 
generally trade in a principal capacity against their customers’ fractional share orders and in turn send out 
principal round lot sized orders for execution to manage their inventory risk. 
607
  Evidence suggests that this growth is in great part due to the rise in direct individual investor participation 
in equity markets. See, e.g., Zhi Da, Vivian W. Fang & Wenwei Lin, Fractional Trading (last revised May 
6, 2022) (unpublished manuscript), available at https://ssrn.com/abstract=3949697 (retrieved from Elsevier 
database). See also Rick Steves, Fractional Shares Experts Weigh In Amid Exploding Retail Trading 
Volumes, FinanceFeeds (June 7, 2021) available at https://financefeeds.com/fractional-shares-experts-
weigh-in-amid-exploding-retail-trading-volumes/, which shows that trading volume increased substantially 
(in one case, more than 1,400%) for brokers after they introduced the use of fractional shares. Furthermore, 
an analysis using CAT data reveals that more than 46 million fractional share orders were executed in Mar. 
2022, originating from more than 5 million unique accounts. Over 31 million of these orders were for less 
than 1 share, and they originated from more than 3.3 million accounts. The overwhelming majority (92%) 
of fractional share orders were attributed to natural persons, i.e., individual investors. While fractional 
shares orders represented only a small fraction (2.1%) of total executed orders, they represent a much 
higher fraction (15.3%) of executions received by individual investors. 
608
  Similarly, if a wholesaler routes a segmented order to a qualified auction and receives the rebate for the 
submission of a segmented order, the wholesaler may indirectly pass the rebate from the qualified auction  
through to the retail broker by using the rebate to subsidize PFOF payments it makes to the retail broker. 

304 
 
order is 10 to 20 cents,
609
 far less than the commission fees previously charged by broker-
dealers, which had generally been $5 or more.  
While PFOF payments per order are relatively small, the small group of retail brokers (10 
firms) that earn at least 2% of their revenue from PFOF on NMS stocks
610
 could be pressured to 
develop or increase other revenue lines and/or attract additional customers to make up for the 
loss of PFOF. However, the dependence on PFOF for some of the top recipients of PFOF 
stemming from NMS stock orders has diminished in recent years due to mergers between PFOF-
dependent firms and firms with less reliance on PFOF. This includes the single largest recipient 
of PFOF, which was purchased by a larger (i.e., higher revenue) retail broker firm that had a 
much smaller share of its revenue stemming from PFOF.
611
 Moreover, the purchasing firm in this 
merger had a much more diversified revenue portfolio, including a large collection of proprietary 
mutual funds and ETFs under management and a banking unit. In addition, the third largest 
recipient of PFOF was purchased in 2020 by a larger, full service broker with no reliance on 
PFOF. These mergers should help insulate leading recipients of PFOF from the financial damage 
that would result from the loss of PFOF due to Proposed Rule 615. 
 
The Commission is mindful that the increase in competition to attract and execute orders 
of individual investors due to the Proposal could significantly impact costs for some exchanges 
                                                
609
  See analysis in supra Table 17.  
610
  See analysis in supra Table 16. 
611
  The largest dollar recipient of PFOF received $101.5 million in PFOF from NMS stocks in Q1 2022, equal 
to 5.7% of its total revenue. The purchasing firm in this merger received $28.9 million in PFOF in NMS 
stocks Q1 2022, equal to 1.5% of its total revenue. 

305 
 
and ATSs.
612
 These costs would be in addition to the compliance costs estimated in section 
VII.D.2.a., and include the potential loss of market share for some exchanges and ATSs. The 
Commission believes that most marketable orders of individual investors would end up being 
exposed and executed in qualified auctions hosted by exchanges, which would increase the 
overall percentage of individual investor orders executed on exchanges, and decrease the 
percentage internalized by wholesalers. The market share of ATSs is expected to be stable 
because they do not handle significant fractions of marketable individual investor orders and thus 
are not affected by the proposed introduction of qualified auctions. The Commission believes 
that few ATSs would operate qualified auctions, either because it would be difficult for new 
ATSs to meet the requirements to run qualified auctions or because the requirements of operating 
a qualified auction would be incompatible with the business models of most currently operating 
ATSs.
613
 
An NMS Stock ATS that wanted to run qualified auctions would face numerous 
requirements, including the need to: permit any registered broker-dealer to become a subscriber; 
provide equal access among all subscribers of the NMS Stock ATS and the registered broker-
dealer of the NMS Stock ATS to all services that are related to a qualified auction operated by 
the NMS Stock ATS or to any continuous order book operated by the NMS Stock ATS;
614
 
display quotes in the ADF (and thus in the consolidated market data feed); and reveal the identity 
                                                
612
 Retail brokers may also choose to directly route their orders to qualified auctions, and may therefore 
compete with wholesalers, ATSs, and exchanges in executing retail orders. However, the Commission 
believes that broker-dealers will play a much more minor role in this competition. 
613
  Of the 32 NMS Stock ATSs, the Commission estimates that approximately 3 would operate qualified 
auctions. See supra section VI.C.4 for further discussions of the estimates of how many NMS Stock ATSs 
would operate qualified auction. 
614
  This would prohibit the ATS from segmenting customer orders outside of qualified auctions (unless the 
orders were executed at midpoint) and require it to charge the same fee to all subscribers (see supra section 
IV.C.4), thereby prohibiting them from charging tiered auction fees or providing tiered rebates. 

306 
 
of the trading venue for trades executed on the ATS and report those trades to the TRF (which 
would report the trades and identity of the trading venue to the consolidated market data feed); 
operate as an automated trading center pursuant to Regulation NMS Rule 603(b) and have an 
average daily share volume of 1.0 percent or more of the aggregate average daily share volume 
for NMS stocks.
615
 ATSs would have to make significant adjustments to their business models 
(especially with regards to segmenting customer orders and displaying quotes) in order to meet 
these requirements.
616
 Additionally, new ATSs that could meet the other requirements might find 
it difficult to achieve 1% market share of trading volume in four out of six months without being 
able to concurrently operate a qualified auction. 
 The Commission acknowledges that Proposed Rule 615 might improve the competitive 
position of higher volume exchanges that offer qualified auctions and harm the competitive 
position of lower volume exchanges that do not. Higher volume exchanges that executed 1% or 
more of the average aggregate daily share volume for NMS stocks during 4 of the last 6 months 
would be eligible to run qualified auctions for segmented orders.
617
 Exchanges that offered 
qualified auctions would have a competitive advantage in attracting marketable individual 
investor order flow because they would be able to segment the individual investor order flow and 
allow liquidity suppliers to trade against this order flow in smaller pricing increments in their 
qualified auctions.
618
 Lower volume exchanges that do not meet the volume thresholds to run 
                                                
615
  See supra section IV.B.2.b. 
616
  The Commission estimates that 3 NMS stock ATSs would participate in qualified auctions. See supra 
section VI.C.4. 
617
  The Commission estimates that six national securities exchanges would meet the proposed threshold. These 
include one exchange each from the NYSE, NASDAQ, and CBOE groups, as well as MEMX, IEX, and 
MIAX PEARL. 
618
  See supra section IV.G for discussions on restrictions on exchanges from operating any separate trading 
mechanism for segmented orders other than qualified auctions. 

307 
 
qualified auctions would not be able to segment individual investor order flow, unless they did so 
under one of the exceptions, such as offering liquidity to individual investor orders only at the 
NBBO midpoint.
619
 Additionally, exchanges not offering qualified auctions would be unable to 
execute segmented orders at the finer 0.1 pricing increments that would be available in the 
qualified auctions. These factors could all limit the competitiveness of smaller exchanges.  
 There is also the possibility that if a disproportionate share of order flow is routed to one 
or more exchanges offering qualified auctions, these exchanges might become the preferred 
trading location for any given stock. This, in turn, could cause a liquidity externality to develop, 
making these venues the preferred routing destination for all orders.
620
 Under such 
circumstances, while the consolidation of liquidity on these exchanges might benefit market 
participants in the short run, it may also lead to barriers to entry in the market for trading 
services, as new entrants would have a harder time attracting sufficient liquidity away from 
established liquidity centers.  
 Lower volume exchanges could also be adversely impacted by the fact that under the 
Proposal, exchanges would have to stop offering RLP programs unless the program resulted in 
trades only at the NBBO midpoint, consistent with a proposed exception. This could result in a 
reduction in the trading volume and revenues received by lower-volume exchanges that do not 
meet the threshold to offer qualified auctions.
621
 
                                                
619
  See supra section IV.B.2.a for a discussion of lower-volume exchanges.  
620
  A liquidity externality could emerge if orders tended to concentrate in one auction, such that it would 
become the preferred routing destination and attract more orders. Orders in more liquid venues would be 
more likely to execute at better prices, which in turn, would provide such venues with a competitive 
advantage over less liquid venues. 
621
  The Commission believes that the mandated auction mechanism largely would remove the need for RLPs 
run by exchanges that would meet the criteria to run qualified auctions. However, exchanges that operate 
RLPs that do not serve as qualified auctions host would be negatively impacted by having their RLP 
services curtailed. Individual or institutional investors, however, should not be significantly adversely 

308 
 
The Commission is unable to quantify the likelihood that one or more exchanges that 
would be unable to offer qualified auctions would cease operating. However, the Commission 
preliminarily believes that this risk of this is low because the majority of individual investor 
marketable orders are not currently routed to exchanges. Therefore, even if they are not eligible 
to run qualified auctions under the Proposal, the reduction in trading volume that these 
exchanges might experience is unlikely to be large enough to require them to exit the market. 
Even if such an exit were to occur, the Commission does not believe this would significantly 
impact competition in the market for trading services because the market is served by multiple 
competitors. Consequently, if one or more lower-volume exchanges were to exit the market, 
demand would likely to be swiftly met by existing competitors. The Commission recognizes that 
lower-volume exchanges might have unique business models that are not currently offered by 
competitors, but believes that a competitor could create similar business models if demand were 
adequate, and if they did not do so, it seems likely new entrants would do so if demand were 
sufficient. 
                                                
impacted by the loss of these RLP services. From the perspective of individual investors, it would be 
unnecessary to execute orders through RLPs because any non-directed retail order would have a chance to 
be exposed to open competition, either because the order would be filled on a riskless principal basis, or 
because the wholesaler who considers internalizing an order would first be required to bring it to a qualified 
auction. From the perspectives of other market participants, e.g., institutional investors, qualified auctions 
would provide a superior means, relative to RLPs, for these participants to directly interact with retail 
orders. This is the case because (1) unlike RLPs, qualified auctions require that characteristics of the order 
are communicated to bidders, including its price, size, and the name of the underlying retail broker; and (2) 
qualified auctions would allow market participants to interact with a substantially larger and more 
persistent pool of segmented retail order flow, relative to that available through RLPs. However the 
Commission acknowledges that the loss of RLP services may adversely impact market participants that 
may currently supply liquidity through existing RLPs but would not be fast enough to submit an auction 
response to a qualified auction message.  

309 
 
 
The Commission recognizes that the Proposal could increase the risk of information 
leakage for institutional investors in at least two ways.  
First, the risk of information leakage may increase for those institutional investors that 
choose to supply liquidity in qualified auctions. Specifically, market participants could use 
auction message information
622
 to identify the trades in consolidated market data that correspond 
to executions of individual investors orders in qualified auctions, which could allow these market 
participants to back out information about the corresponding institutional bids.
623
 For example, if 
a market participant observes that a large volume of individual investor buy orders are filled in 
qualified auctions, they could correctly discern that an institutional investor may be providing a 
large sell order. However, in response to this concern, institutional investors could decide to 
route their orders to ATSs and OTC market makers, where information about their orders may be 
better concealed.
624
 To the extent that concerns over the risk of information leakage prevent 
                                                
622
  Proposed Rule 615(c)(1) specifies that an auction message announcing the initiation of a qualified auction 
for a segmented order must be provided for dissemination in consolidated market data, including the 
disclosure that the auction is for a segmented order, the identity of the open competition trading center, 
NMS stock symbol, side (buy or sell), size, limit price, and identity of the originating broker for the 
segmented order (unless they certified that no bidder in the qualified auction knew the identity of the 
originating broker). Note that institutional bids in qualified auctions would not be revealed unless they were 
the winning bid and resulted in an execution. 
623
  See, e.g., Liyan Yang & Haoxiang Zhu, Back-Running: Seeking and Hiding Fundamental Information 
About Institutional Order Flows, 33 Rev. Fin. Studies 1484, 1487 (2020) (“...information about retail order 
flows is equivalent to information about institutional order flows, by market clearing.”). 
624
  Trades executed off-exchange, including those executed on ATSs and by OTC market makers, are reported 
to Trade Reporting Facilities (TRFs), which are facilities through which members report transactions in 
NMS stocks, as defined in SEC Rule 600(b)(47) of Regulation NMS. See Trade Reporting Facility (TRF), 
FINRA, https://www.finra.org/filing-reporting/trade-reporting-facility-trf. However, as a result of the 
Proposal, it may be easier to identify institutional trades using TRF data; see infra this section for further 
discussion. Furthermore, it may currently be possible to identify institutional trades in TRF data; see infra 
note 627 and corresponding discussion. 

310 
 
institutional investors from seeking liquidity through qualified auctions, this could limit the 
benefits of the Proposal.  
Second, as individual investors’ marketable orders would be increasingly routed to and 
executed in qualified auctions under the Proposal, and as these orders would become more easily 
identifiable through the information contained in auction messages as described above, it may 
become increasingly possible to identify information about off-exchange institutional trades in 
TRF data.
625
 In the most extreme case, if virtually all individual investor orders are routed to and 
executed in qualified auctions, market participants may be able to identify nearly all off-
exchange institutional transactions reported in the TRF data as originating from institutional 
trades.
626
 In this way, information leakage might increase even for institutional investors that 
choose not to participate in qualified auctions. 
However, it is possible that information on institutional order flow is already discernable 
through multiple means. First, there is evidence that institutional order flow can be inferred by 
first identifying individual investor order flow, which can be estimated using sub-penny trades in 
TRF data.
627
 In addition, wholesalers already may have the ability to discern institutional order 
flow due to their knowledge of individual investor order flow. Thus, while there is concern over 
                                                
625
  See, e.g., Yang & Zhu, supra note 623, for further discussions on the identifying institutional investor 
orders. 
626
  For those individual investor orders that would have been internalized by wholesalers and reported as a 
trade to the TRF but are instead executed in qualified auctions, these trades would be reported as trades 
executed on the exchange or ATS operating the qualified auction, rather than reported to the TRF. This 
would reduce the number of individual investor trades reported to the TRF. 
627
  See, e.g., Boehmer et al., supra note 572, who use this methodology to identify individual investor activity. 
Specifically, using TRF data, the authors identify transactions as retail buys if the transaction price is 
slightly below the round penny and as retail sells if the transaction price is slightly above the round penny. 
Some institutional trades receive sub-penny price improvement as a result of midpoint trade price ends in a 
half-penny. Thus, trades at or near a half-penny are likely to be from institutions and are not assigned to the 
retail category.  

311 
 
information leakage for institutional order flow, it may be the case that much of this information 
is already identifiable. To the extent that qualified auctions would result in further information 
leakage, the Proposal may result in additional costs for institutional investors.
628
 However, this 
effect could be balanced by the increased price improvement that institutional traders would 
receive by being able to interact directly with individual investor order flow in qualified 
auctions. 
The Proposal may also result in wholesalers reducing the liquidity they supply to 
institutional investors via SDPs.
629
 With reduced wholesaler liquidity provision on SDPs, 
institutional investors might have to resort to other sources of liquidity, e.g., exchanges and 
ATSs or supplying liquidity to qualified auctions. An appealing feature of SDPs from an 
institutional investor perspective is the possibility of disclosing intended order size without being 
detected by other market participants competing for the same liquidity. By switching to other 
sources of liquidity, institutions would no longer enjoy this benefit. Hence, these institutions 
might find it more costly to locate liquidity as they need to protect their intended trade sizes to 
minimize price impact of trades.
630
  
 
There is a possibility that Proposed Rule 615 could cause displayed LOB liquidity to 
decrease. The Commission believes that the Proposal might entice some liquidity provision to be 
                                                
628
  For example, in a study of the Swedish equity market, one academic paper found that a one-standard-
deviation increase in the extent to which HFTs trade in the same direction as large institutional orders is 
associated with a $4,480 higher order execution cost for institutional investors. This result led the authors 
to conclude that the detection of large institutional orders is costly for institutional investors. See Vincent 
Van Kervel & Albert J. Menkveld, High-Frequency Trading Around Large Institutional Orders, 74 J. Fin. 
1091 (2019).  
629
  See supra section VII.C.2.c. 
630
  However, institutional investor costs could also fall when they are able to trade against individual investor 
orders in qualified auctions. See supra section VII.C.1.c. 

312 
 
redirected from exchange LOBs to qualified auctions,
631
 which could have an adverse impact on 
quoted LOB depth and the NBBO. More specifically, if liquidity is diverted to qualified 
auctions, there is the risk that the NBBO could widen because some market participants might 
reduce the frequency or the size of the orders they submit to the LOB, including orders that set 
the NBBO prices.
632
 However, there would be trade-offs regarding the execution risk and 
execution price that might limit the incentives to bid in an auction compared to supplying 
liquidity in the LOB.
 633
 Moreover, the majority of marketable orders of individual investors are 
already segmented from exchanges and thus are not currently reaching exchange LOBs.
634
 
Therefore, although LOB liquidity may decline under the Proposal, there is the potential that the 
direct effect of qualified auctions on LOB liquidity may not be significant. 
An additional possibility is that if the Proposal results in the elimination of zero-
commission trading, retail trading volume could decline and the overall pool of liquidity could 
shrink due to increased wholesaler inventory risk.
635
 A lower overall liquidity level might also 
manifest itself in lower displayed liquidity in exchange LOBs. For example, the introduction of 
qualified auctions might induce some (more sophisticated) individual investors to switch from 
                                                
631
  The Commission also is proposing to amend rules addressing minimum pricing increments. See Minimum 
Pricing Increments Proposal, supra note 98. The Commission encourages commenters to review that 
proposal to determine whether it might affect their comments on this proposing release. 
632
  The submission of smaller orders might also require aggregation of odd-lot orders across more price levels 
to reach a round lot size, which would cause the NBBO to widen. 
633
  See infra section VII.C.3.a.iii for further discussion on the trade-offs involved in supplying liquidity to a 
qualified auction vs. submitting an order to an LOB. 
634
  See supra section VII.B.2.a for a discussion of estimates that appear to indicate that over 90% of individual 
investor marketable orders are routed to wholesalers and supra section VII.B.2.b for estimates that 
wholesalers internalize 90% of executed dollar volume in individual investor marketable orders that were 
routed to them. 
635
  A reduction in retail trading volume as a result of the Proposal may decrease a wholesaler’s ability to 
manage their inventory risk associated with their other trading activities, such as exchange market making 
or supplying liquidity through their SDPs. This may cause wholesalers to reduce the liquidity they supply 
in their other activities.  

313 
 
placing non-marketable limit orders priced at or outside the NBBO to placing (a) marketable 
orders or (b) non-marketable orders priced between the midpoint and the NBO (NBB) for buy 
(sell) orders, which may participate as segmented orders in qualified auctions.
636
 In this sense, 
the pool of non-marketable resting orders that would be routed to exchanges might shrink, 
potentially reducing the depth at the NBBO.  
 
 
  As discussed in more detail below, the creation of qualified auctions under the Proposal 
would result in most marketable orders of individual investors being exposed in qualified 
auctions on exchanges and ATSs that are eligible to serve as open competition trading centers.
637
 
The Commission estimates that 6 exchanges and 3 ATSs could operate qualified auctions. 
Exchanges should have strong economic incentives to offer qualified auctions because the lower 
adverse selection risk of marketable order flow of individual investors makes it a valuable 
commodity that would attract trading interest from other market participants and increase the 
                                                
636
  A segmented order in a qualified auction could have the benefit of an increased likelihood of execution 
compared to non-marketable limit orders submitted to a LOB because bidders may supply liquidity (and 
potentially earn part of the spread) to orders submitted to a qualified auction. Non-marketable limit orders 
submitted to a LOB would have to wait until an opposite side marketable order arrived to potentially 
execute, which could result in a greater risk of the order not executing. However this increased likelihood 
of execution would come at the cost of earning a spread by using a non-marketable limit order. 
637
 Proposed Rule 615 covers only NMS stocks. Qualified auctions would be conducted for “segmented 
orders,” which would be defined in Proposed Rule 600(b)(91) as an order for an NMS stock for an account 
of a natural person, or an account held in legal form on behalf of a natural person or group of related family 
members, and that for such an account, the average daily number of trades executed in NMS stocks must be 
less than 40 in each of the preceding six calendar months. See supra note 194 and corresponding text for a 
discussion of a Commission analysis indicating that during the six-month period (Jan. 1, 2022, to June 30, 
2022), slightly more than 99.9% of individual investor accounts averaged 40 or fewer orders per day that 
resulted in a trade. Moreover, during the same period, 99% of individual customer accounts averaged 1.86 
or fewer orders per day that resulted in a trade; see analysis in infra Table 22. 

314 
 
exchange’s trading volume and the associated revenue it delivers.
638
 For this reason, it is likely 
that there would always be at least one exchange or ATS operating a qualified auction.
639
  
Exchanges and ATSs operating qualified auctions would significantly increase 
competition among liquidity suppliers to fill marketable orders of individual investors, since the 
majority of these orders are currently internalized by wholesalers without competition on the 
individual order basis.
640
 This increase in competition would have a significant effect on the 
business model of wholesalers and might reduce the volume of order flow that they internalize. 
This would affect the competitive dynamics between exchanges, wholesalers and ATSs related 
to how they compete for both individual and institutional order flow and could result in more 
orders being routed to exchanges that run qualified auctions. Additionally, there would be 
competitive implications for how qualified auctions interact with exchange LOBs. Additional 
analysis is provided below regarding the expected impact of the Proposal on competition: i) in 
the market to supply liquidity to individual investor orders, ii) between exchanges, ATSs, and 
wholesalers, and, iii) between exchange LOBs and qualified auctions. 
i. Competition to Supply Liquidity to Individual Investor 
Orders 
                                                
638
  See supra section IV.B.2 for further discussion on the incentives for exchanges and ATSs to offer qualified 
auctions. 
639
 In cases where no open competition trading center chose to operate a qualified auction for a security, the 
broker-dealer or wholesaler handling the order would have the option to internalize the order. See supra 
section IV.A for further discussion of options for segmented orders that did not receive an execution in a 
qualified auction. However, it’s very likely that at least one exchange or ATS would operate a qualified 
auction for an order. Because of the low adverse selection risk associated with segmented orders, if a single 
exchange or ATS operated a qualified auction, the trading facility would likely attract additional order flow 
to supply liquidity to segmented orders, which would increase its trading volume. This could potentially 
increase the exchange or ATS’s revenue because a portion of SIP revenue is allocated among facilities 
based on trading volume (FINRA also rebates SIP revenue it receives for the TRF back to its members 
based on their trading volume). 
640
   See supra section VII.B.2.b for a discussion of wholesaler internalization. 

315 
 
Qualified auctions would enhance competition to provide liquidity to individual investors 
at the individual order level by drawing additional liquidity from other market participants 
besides the wholesaler handling the individual investor order, including other wholesalers that 
could bid in the auctions. Currently, once a wholesaler receives order flow, another wholesaler is 
unable to interact with these orders unless they are rerouted to that other wholesaler. Routing 
these orders to qualified auctions would prevent these orders from being isolated and instead 
allow them to be exposed to other market participants, including other wholesalers, that could 
bid for the right to execute them.  
The lower adverse selection risk of individual investor orders should incentivize other 
liquidity providers to participate in qualified auctions. It is the Commission’s understanding that 
market participants quote significant liquidity at prices superior to the NBBO.
641
 This liquidity 
primarily includes inside-the-NBBO odd-lot liquidity quoted on exchanges and non-displayed 
liquidity quoted on exchanges and ATSs, originating from various market participants, including 
institutional investors, market makers, and individual investors. In addition, some market 
participants that currently use marketable orders to demand liquidity from intermediaries might 
benefit from participating in qualified auctions, i.e., quote liquidity at prices better than the 
NBBO, to satisfy their liquidity needs. Proposed Rule 615 would provide an opportunity for 
these participants to potentially trade with individual orders with lower adverse selection by 
redirecting their liquidity provision to open qualified auctions or to switching from demanding to 
supplying liquidity through qualified auctions.  
                                                
641
  See supra Table 20 and accompanying discussion in supra section VII.C.1.b for estimates of liquidity 
available at the NBBO midpoint on exchanges and NMS Stock ATSs when a wholesaler internalizes a 
trade. 

316 
 
It would also give institutional investors a chance to directly interact with individual 
investor orders with a minimal degree of intermediation. For example, institutional investors 
with pressing liquidity demand typically rely on optimal trade execution algorithms that split 
their trades into child orders, which may demand liquidity, including on SDPs, where they may 
potentially end up paying the full spread.
642
 The availability of marketable individual investor 
order flow at qualified auctions would likely draw institutional trade execution algorithms to 
supply liquidity in qualified auctions, where they might trade at the quote midpoint or at least 
inside the NBBO. By doing so, institutional orders would be filled without paying the full 
spread. This would not only increase the competition in liquidity provision against individual 
investor orders, but would also reduce institutional trading costs. 
 Some auction features would also enhance competition to supply liquidity to individual 
investor orders. The Proposal would facilitate finer price improvements for inside-NBBO orders 
by allowing a 0.1-cent quoting increment for shares priced at $1.00 or more per share. This 
would enhance competition by improving the ability of market participants to be able to compete 
on price in their auction responses, since they could quote in finer increments than they could on 
exchange or ATS LOBs.
643
 An additional source of increased competition to supply liquidity 
would stem from the implementation of a 5 mil auction fee and rebate cap for shares priced at 
$1.00 and above and 0.05% for share prices under $1.00. Mandating low, flat fees and rebates in 
qualified auctions should promote a level playing field among all potential market participants 
                                                
642
  See supra section VII.B.3 for further discussions on how institutional investors may indirectly interact with 
individual investor orders via trading on SDPs. 
643
  See supra section VII.C.1.a for further discussions on how the auction pricing increment could improve 
competition among liquidity suppliers. 

317 
 
that may wish to trade with segmented orders and therefore serve to increase competition among 
liquidity suppliers.
644
  
 The Commission is uncertain what effect the proposed requirement to give customer 
orders priority if auction responses are at the same price would have overall on the competition 
to supply liquidity to individual investor orders. On the one hand, giving priority to customer 
orders may encourage more customers, including institutional investors, to participate in 
qualified auctions, potentially increasing competition to supply liquidity to segmented orders. On 
the other hand, it could discourage liquidity provision by broker-dealers in qualified auctions, 
potentially decreasing competition to supply liquidity to segmented orders. However, qualified 
auctions overall would still enhance competition among broker-dealers to supply liquidity to 
individual investor marketable orders, because a significant portion of these would be exposed to 
multiple broker-dealers in a qualified auction instead of being execution in isolated at a 
wholesaler. 
The Commission acknowledges that there could be some limitations on the increases in 
competition to supply liquidity to individual investor orders. The Commission recognizes that 
there are some institutional investors that may currently source liquidity from SDPs in order to 
avoid triggering reactions by market participants who would observe institutional trades might 
avoid qualified auctions and instead continue to access liquidity via other methods. Additionally, 
due to the sub-second duration of the auctions mandated by the Proposal, participation would 
require access to algorithmic trading technology, which could prevent some potential providers 
of liquidity from participating in qualified auctions.
645
 In sum, however, the net effect of 
                                                
644
  See id. and supra section IV.C.4 for additional discussions on the auction fee and rebate caps. 
645
  See supra section VII.C.1.a for further discussion on the effect of not having access to algorithmic 
technology on qualified auction participation. 

318 
 
qualified auctions would be an increase in competition to supply liquidity to the orders of 
individual investors. 
ii. Competition Among Exchanges, ATSs, and OTC 
Market Makers  
Proposed Rule 615 would increase competition among wholesalers, ATSs, and exchanges 
in attracting and executing order flow of individual investors.
646
 It is likely that the share of order 
flow currently internalized by wholesalers or executed on ATSs that do not serve as auction 
hosts would decline. Wholesalers receiving order flow from retail brokers could still end up 
internalizing a substantial portion of orders that they route to qualified auctions. However, 
because the orders would be subject to competition from other liquidity suppliers, wholesalers 
would likely win a smaller share of auctions compared to the share of orders that they currently 
internalize, for which they do not face competition at the individual order level. 
The Proposal might improve the competitive position of higher volume exchanges that 
offer qualified auctions and harm the competitive position of lower volume exchanges that do 
not. Higher volume exchanges that execute 1% or more of the average daily share volume for 
NMS stocks during 4 of the last 6 months would be eligible to run qualified auctions for 
segmented orders.
647
 Exchanges that offered qualified auctions would have a competitive 
advantage in attracting marketable individual investor order flow because they would be able to 
segment this order flow and allow liquidity suppliers to trade against it in smaller pricing 
increments ($0.001) in the qualified auctions that they host compared to the minimum price 
                                                
646
 Retail brokers might also choose to directly route their orders to qualified auctions, and might therefore 
compete with wholesalers, ATSs, and exchanges in executing individual investor orders. However, the 
Commission believes that broker-dealers would play a much more minor role in this competition.  
647
  The Commission estimates that six national securities exchanges would meet the proposed threshold. These 
include one exchange each from the NYSE, NASDAQ, and CBOE groups, as well as MEMX, IEX and 
MIAX PEARL. 

319 
 
increment on national exchanges ($0.01).
648
 The Commission is unable to quantify the likelihood 
that one or more exchanges that would be unable to offer qualified auctions would cease 
operating. Even if such an exit were to occur, the Commission does not believe this would 
significantly impact competition in the market for trading services because the market is served 
by multiple competitors.
649
 
The Proposal would also likely increase competition between exchanges, ATSs, and OTC 
market makers to attract institutional order flow. The requirement to expose segmented orders in 
qualified auctions could improve the competitive position of exchanges and ATSs that run 
qualified auctions relative to most ATSs
650
 and all OTC market makers, including SDPs, which 
would not be allowed to host auctions. The resulting increase in marketable orders of individual 
investors routed to exchanges and ATSs that operate qualified auctions, relative to other venues, 
would entice institutional investors to seek to supply liquidity to marketable individual investor 
orders through these auctions. 
The Proposal would likely have an adverse impact on the competitive positions of 
wholesaler-affiliated SDPs to attract institutional order flow by reducing the liquidity available 
therein to institutional investors.
651
 Specifically, the Proposal might lead retail brokers to directly 
                                                
648
  Qualified auctions would have a price increment of $0.001 for shares priced at $1.00 or greater and 0.1% 
for shares under $1.00, in contrast to national exchanges, which have a minimum price increment of $0.01. 
649
  See supra VII.B.1 for a discussion of the market for trading services in NMS stocks. See also supra section 
VII.C.2.e for additional discussion on the effects of the Proposal on small and large exchanges. 
650
  As discussed in supra section VI.C.4, the Commission believes that 3 ATSs would operate a qualified 
auction. 
651
 Institutional investors (or the brokers that represent them) would be able to bid in qualified auctions in 
order to directly interact with individual investor orders. This could give the execution of institutional 
orders better terms because institutional investors would not need to compensate the wholesaler for the 
intermediation services provided by their SDPs. As such, some of the institutional interest would migrate 
from its SDPs to qualified auctions due to more competitive pricing in the qualified auctions. Therefore, the 
loss of access to liquidity for institutional investors provided by SDPs would be mitigated by the ability of 

320 
 
route more of their customer orders to exchanges and ATSs operating qualified auctions instead 
of directing their orders to wholesalers.
652
 In addition, wholesalers receiving orders from retail 
brokers that they then route to qualified auctions could lose a significant share of these auctions 
to other bidders. These effects would hamper the ability of wholesaler-operated SDPs and other 
OTC market makers to manage their inventory risk by internalizing incoming individual investor 
order flow. This might reduce the ability of these wholesalers and other market makers to 
provide liquidity to institutional investors, who might instead rely on other trading venues, 
including qualified auctions, to meet their liquidity needs. The Commission is unable to quantify 
the extent to which institutional order flow would migrate to exchanges or ATSs that run 
qualified auctions.  
The risk of information leakage from institutional investors’ orders participating in 
qualified auctions could also impact competition between exchanges, ATSs and OTC market 
makers. The Commission recognizes that concerns over the risk of information leakage could 
prevent institutional investors from seeking to provide liquidity in qualified auctions.
653
 One 
possible way that leakage could occur is if a large volume of individual investor buy orders are 
filled consecutively at the midpoint, then market participants might correctly discern that an 
institutional investor is working a large sell order. Because the side and venue of an institutional 
order executed off-exchange would continue not to be revealed in a TRF trade print under 
Proposed Rule 615, ATSs and OTC market makers would remain competitive in terms of their 
                                                
institutional traders to supply liquidity to marketable orders of individual investors in qualified auctions. 
See supra section VII.B.3 for further discussions on institutional investors interactions with SDPs. 
652
  See supra section VII.C.1.a. 
653
  See supra section VII.C.2.f for additional discussions on how the Proposal could affect information leakage 
of institutional investor orders. 

321 
 
ability to conceal intended institutional trades.
654
 Institutional investors would likely weigh the 
trade-off between potentially lower trade costs provided by qualified auctions and the greater 
concealment of their trading intentions provided by off-exchange executions. In cases where the 
latter objective was paramount, institutional investors could decide to avoid routing some of their 
orders to qualified auctions. As such, ATSs and OTC market makers might remain attractive 
trading venues for such institutional orders. 
Overall, however, the increase in marketable order flow on exchanges and ATSs that 
operate qualified auctions, relative to other venues, would entice institutional investors to supply 
liquidity to marketable individual investor orders through these auctions. Due to the enhanced 
competition provided by qualified auctions, it is likely that execution costs of institutional 
investors’ parent orders would be reduced, which in turn, should further the likelihood that 
institutional order flow would be attracted to exchanges and ATSs that operate auctions. The 
execution priorities of Proposed Rule 615 would reinforce this effect. Under paragraph (c)(5)(ii) 
of the proposed rule, if an institutional investor and a wholesaler (broker-dealer) were bidding 
the same price in a qualified auction, the investor would have execution priority. As such, all else 
constant, institutional investors would win qualified auctions when competing with wholesalers. 
This would reduce execution uncertainty from the perspectives of institutional investors who 
would consider bidding in qualified auctions on exchanges, as well as reduce their trading costs 
as a result of direct interactions with individual investor order flow. These collective effects 
                                                
654
  Institutional bids in qualified auctions would also have some ability to be concealed, because they would 
not be revealed unless they were the winning bid. If they do have the winning bid, the side, venue, and 
price of the institutional bid would be revealed, which may provide more information leakage than some 
trades on ATSs. 

322 
 
would result in less institutional orders being routed to ATSs and OTC market makers, including 
SDPs. 
The Proposal would also generate competition between qualified auctions that are offered 
on different exchanges and ATSs.
655
 Open competition trading centers running qualified auctions 
might compete with each other by trying to offer the most price improvement in their auctions.
656
 
They might also compete with each other through innovations in their auctions protocols in order 
to differentiate themselves and attract more segmented orders and liquidity suppliers. Open 
competition trading centers might also try to compete with each other on the basis of fees or 
rebates they charge in their qualified auctions. However, the Commission believes that this form 
of competition might be limited because of the flat 5 mil auction fee and rebate cap on executed 
auction responses and the flat 5 mil rebate cap on segmented orders submitted to auctions.
657
 
More specifically, while providers of qualified auctions could compete by charging a fee under 
the 5 mil cap, this discount would provide far less latitude for attracting orders compared to the 
30 mil fee cap on the LOB.
658
 Furthermore, volume-based rebate and fees, which are utilized by 
many exchanges in their transaction based fee schedules, would not be permitted within qualified 
auctions (but would remain permitted on exchange LOBs). Therefore, the Commission believes 
that competition based on auction fees and rebates would be minimal. 
iii. Competition Between Qualified Auctions and Exchange 
LOBs 
                                                
655
  The Commission includes ATSs to the degree that they would offer qualified auctions. See supra section 
VII.C.1.a. 
656
  See supra section VII.C.1.a. 
657
  See supra section VII.C.1.a for further discussions on the effects of auction fees and rebates. 
658
  See 17 CFR 242.610(c). 

323 
 
The Commission believes that the Proposal might entice some liquidity provision from 
exchanges’ LOB to qualified auctions. A core function of the mandated qualified auction 
mechanism under Proposed Rule 615 would be to segment order flow of individual investors, 
leading to a concentration of this order flow in qualified auctions. As a result, some market 
participants might consider redirecting liquidity provision from the LOB to qualified auctions. In 
doing so, market participants would need to consider the following under the Proposal: (1) 
Displayed orders on the LOB would have priority over auction responses if they were listed at 
the same price, and a winning auction response would have priority over hidden orders on the 
LOB; (2) for shares priced $1 or greater, LOB quoting is subject to a 1-cent price increment,
659
 
while qualified auctions would accept bids using a 0.1-cent price increment, allowing auction 
responses to jump in front of LOB quotes by quoting at sub-penny prices; and (3) broker-dealers 
with knowledge of where a segmented order is to be routed would not be allowed to submit LOB 
orders that could have priority to trade with the segmented order.
660
 To the extent that market 
participants quoting visible or hidden liquidity on the LOB prefer to trade against the individual 
investor segment of the order flow through qualified auctions, they might provide liquidity to 
auctions rather than quote liquidity on the LOB. 
 The Commission is unable to quantify the magnitude of this potentially redirected 
liquidity from the LOB to qualified auctions. However, the Commission recognizes that there 
would be a trade-off between adverse selection risk (which would be higher on an exchange 
LOB compared to qualified auctions, where individual investor orders would be segmented) and 
execution risk (i.e., the risk of non-execution, which would be higher for auctions). In general, 
                                                
659
  See supra note 146. 
660
  See Proposed Rule 615(f)(2). 

324 
 
qualified auctions should provide greater price improvement due to their lower adverse selection 
risk. However, redirecting displayed liquidity to qualified auctions might increase the execution 
risk and trading costs associated with the order. There might be less certainty regarding whether 
a bid in a qualified auction would execute because it would be competing against other bids that 
would not be displayed.
661
 Additionally, bids in qualified auctions would lead to execution only 
if the market participant is willing to trade at worse prices that could lead to winning the auction, 
which may lower the spread that they would earn relative to executing their non-marketable limit 
order on a LOB.
662
 Thus, the execution risk of submitting a bid in a qualified auction could be 
greater than posting an order at or inside the NBBO on a LOB. However, these risks associated 
with auctions would be somewhat offset by the lower adverse selection risk of trading against a 
segmented order in a qualified auction. Overall, the Commission believes that redirection of 
liquidity from the LOB to qualified auctions would be limited and would not significantly reduce 
execution quality on the LOB.  
In addition, the name-give-up requirement could potentially reduce wholesaler liquidity 
on the LOB if a wholesaler handled a segmented order where the originating broker made the 
certification under proposed Rule 615(c)(1)(iii) that the identity of the originating broker will not 
be disclosed, directly or indirectly, to any person that potentially could participate in the 
qualified auction or otherwise trade with the segmented order. Some retail brokers may seek 
certification to not disclose their identity, which would impose explicit costs on these broker-
dealers (as discussed above in section VI.C.3). In addition, it could curtail wholesaler activity if a 
                                                
661
 Bids in qualified auctions would not be displayed. 
662
  Additionally, a non-marketable limit order may earn a greater rebate from supplying liquidity on a maker-
taker exchange LOB compared to in a qualified auction, which would have rebate cap of 5 mils on 
executed auction responses. 

325 
 
wholesaler had an order resting on the limit order book and routed a segmented order originating 
from a broker that made the certification under proposed Rule 615(c)(1)(iii) to a qualified 
auction on the same exchange. In this case, the wholesaler would likely have to cancel its resting 
limit order if it wanted to trade against the segmented order in the auction, since the limit order 
book is included in the auctions. Thus, certification could impact wholesaler quoting on 
exchanges.
663
  
 
Retail brokers choose how to access the market for trading services in NMS stocks in 
order to fill their customers’ orders. Currently, retail brokers primarily access this market via 
wholesaler internalization, although broker-dealers with exchange memberships or ATS 
subscriptions can access the market directly.
664
 Retail brokers without these memberships or 
subscriptions must route their order to wholesalers or to other brokers that either have direct 
access to exchanges and ATSs, or have the routing resources to deliver orders to market centers. 
The introduction of qualified auctions would likely reduce the profit that wholesalers earn on 
internalizing marketable order flow, which in turn could result in the decision by wholesalers to 
start charging a fee for routing services. This would improve the competitive position of broker-
dealers with routing access to qualified auctions.
665
 Retail brokers might further choose not to 
route to wholesalers if they want to avoid the requisite identity disclosure requirement. It is likely 
that other routing brokers with access to qualified auctions would compete to receive order flow 
                                                
663
  Wholesalers could indirectly pass their costs for this back to the originating brokers if wholesalers charged 
them a fee for handling segmented orders where the originating brokers made the certification under 
proposed Rule 615(c)(1)(iii). 
664
  See supra section VII.B.2.a for further discussion of broker-dealer routing and market access. 
665
  The Commission estimates that 182 retail brokers (157 originating brokers and 25 routing brokers) would 
be able to route orders to qualified auctions. See supra note 286 and accompanying text. 

326 
 
from retail brokers without this access. The Commission is uncertain of the extent to which 
routing services would shift away from wholesalers towards other routing brokers. However, the 
implementation of qualified auctions could generally be expected to reduce the benefit of 
wholesaler vertical integration and the potential profits they get from internalizing individual 
investor orders.
666
 
 
 Wholesalers have been able to secure larger profits by accessing and internalizing the 
majority of marketable order flow of individual traders, which carries less adverse selection risk. 
The Proposal would require wholesalers to route this order flow to qualified auctions,
667
 opening 
these orders to competition with other market participants. This competition could result in the 
wholesaler not winning the auction. In the event that the wholesaler actually wins the auction, it 
is likely that the increased competition would cause the realized spread (i.e., the wholesaler’s 
profit margin) it receives from internalizing these orders to fall. Declining profit margins could 
reduce the financial latitude that wholesalers needed to pay PFOF to retail brokers.
668
 The 
Commission also recognizes that the decline or disappearance of PFOF would impact retail 
brokers, although this impact would vary widely across brokers, since only some broker-dealers 
receive PFOF, and the amount of PFOF differs across retail brokers that do receive it. In 
                                                
666
  See supra section VII.C.3.a.ii for a discussion of how Proposed Rule 615 would increase competition 
among wholesalers, ATSs, and exchanges in attracting and executing order flow of individual investors. 
667
  This would be the case unless the wholesaler internalized the order under one of exceptions, such as 
executing it at the midpoint. If the wholesaler chose to internalize individual investor orders at midpoint, 
the marginal profit earned from supplying liquidity, represented by the wholesaler’s realized spread, would 
be reduced. Currently, wholesalers have an average realized spread of 0.72 (see Table 6). Midpoint 
execution, by definition, generates, at best, a zero realized spread, assuming no adverse price impact. While 
the broker-dealer may have other incentives to execute a trade with a negative realized spread, such as 
reducing inventory risk or as part of a hedging strategy, all else equal, a positive realized spread would 
always be preferable. 
668
  See supra section VII.B.5.c. 

327 
 
particular, as discussed in Section VII.B.6.a,
669
 four retail brokers received 94% of all PFOF in 
2021, and PFOF represented only a fraction of these four retail brokers’ total revenues.  
The Commission acknowledges that the implementation of qualified auctions and the 
likely subsequent reduction in PFOF could pose a competitive threat to retail brokers that are 
dependent on PFOF and lack alternate revenue sources to compensate for this loss of revenue.  
If wholesalers reduce PFOF or begin charging a fee for routing services, PFOF retail brokers 
would have to absorb this cost and earn lower profits and/or pass on a share of this cost to their 
customers. This would, in particular, depend upon the competition they face. For instance, if 
PFOF retail brokers earn economic rents, then they could absorb some of these costs, which 
would come out of their profit. If PFOF retail brokers primarily face competition from other 
PFOF retail brokers, then these brokers could pass on the costs to their consumers. That said, to 
the extent that PFOF brokers face competition from non-PFOF brokers, then their ability to pass 
on costs to their customers, such as in the form of higher commissions on stock and ETF trades, 
could be constrained. More specifically, non-PFOF brokers (which would not be harmed by the 
disappearance of PFOF) would be unlikely to resume charging commissions, which would put 
competitive pressure on commission rates that other retail brokers could charge and still retain 
customers. In this context, if the ability of smaller retail brokers to charge commissions is 
constrained by competition, it could increase the competitive advantage of larger retail brokers, 
which could raise the barriers to entry for new brokers and cause some smaller retail brokers to 
exit the market. The Commission is unable to quantify the likelihood one or more retail brokers 
would cease operating.  
                                                
669
  See supra Table 16 and corresponding discussion for an analysis of the rate of PFOF across retail brokers. 

328 
 
Another feature of Proposed Rule 615 that could impact competition in the market for 
retail brokers is the option that allows an originating broker to avoid disclosure of its identity by 
certifying that its identity will not be disclosed, directly or indirectly, to any person that 
potentially could participate in the qualified auction or otherwise trade with the segmented order, 
as specified in Proposed Rule 615(c)(1)(iii) and (e)(3).
670
 Broker-dealers carrying the greatest 
adverse selection risk could determine that their execution risk is improved by remaining 
anonymous, despite the possibility that their anonymity could signal that they carry above 
average adverse selection risk.
671
 However, the Commission estimates that this effect on the 
market would be relatively minor due to the modest number of retail brokers (20 firms)
672
 that 
would be expected to choose to use this certification. 
 
The Commission believes the Proposal might have both positive and negative effects on 
efficiency. The Proposal might have negative effects on the efficiency of wholesaler operations 
and the efficiency with which marketable individual investor orders are executed, but the 
Commission believes both these effects might be minimal. On the other hand, price efficiency 
might improve due to an increase in pre-trade and post trade transparency for the segmented 
orders that are exposed in a qualified auction.
673
  
The Proposal might decrease the overall efficiency of wholesaler operations, although 
this effect is likely to be minimal. The success of wholesalers typically relies in part on 
                                                
670
  See supra note 477. 
671
  See discussion in supra section VI.C.3. The Commission’s estimate is based on the number of broker-
dealers that are belied to have sufficiently large number of informed traders. 
672
  See supra section VI.D.3. 
673
  See supra section VII.C.1.d for further discussion of how the Proposal would increase pre-trade 
transparency and price efficiency. 

329 
 
significant investment spending on high frequency trading technology. It also relies on firm-
specific expertise that has been cultivated over time on how to most effectively utilize this 
technology. However, if increased competition due to a mandated qualified auction system 
reduces the volume and/or profit margins of wholesalers, it is conceivable that one or more 
wholesalers might exit the business of handling and internalizing individual investor orders.
674
 
Assuming that the market power of the industry’s most active wholesalers is at least 
partially (if not primarily) due to the particular efficiencies that these firms provide, the 
possibility of exit by one of these firms perhaps poses a risk of overall diminished efficiency. 
However, remaining wholesalers (or, alternatively, other executing brokers or OTC market 
makers) should be able to provide the routing and execution services to the customers of the 
exiting wholesaler. In fact, Rule 606 reports reveal that broker-dealers currently route to multiple 
wholesalers and do not restrict their routing to a single wholesaler. Moreover, the Commission’s 
view is that all current wholesalers would likely remain operating, albeit possibly with reduced 
profit margins. Net profit margins among wholesalers are fairly high, averaging 39.9% in Q1 
2022, compared to 19.9% for the broker-dealer industry as a whole.
675
 Finally, the Commission 
believes that retail brokers would be able to shift their orders towards other wholesalers without 
much difficulty in the event that any wholesalers chose to exit the business. In fact, retail brokers 
regularly re-assess whether their current allocation of trading interest to liquidity providers, 
including wholesalers, exchanges, and ATSs, is optimal. As a result, the Commission does not 
                                                
674
  Wholesalers also have other business lines. While a wholesaler might stop handling and internalizing 
individual investor orders, it is possible that the wholesaler may continue to supply liquidity to individual 
orders through qualified auctions if one of its other business lines, such as an exchange market maker or 
proprietary trading desk, bids in qualified auctions. 
675
  Profit margin data are calculated using FOCUS data, and calculated as [(total revenue - total 
expenses)/(total revenue)] × 100. See supra Table 16 for the share of revenue stemming from PFOF for 
NMS stock orders across PFOF brokers. The two largest wholesalers in terms of volume earned 44% and 
41% profit margins, respectively. 

330 
 
expect the Proposal to have a significant adverse effect on the overall efficiency of wholesaler 
operations. 
Additionally, the Proposal might reduce the efficiency with which marketable individual 
investor orders are executed, but these effects would likely be minimal. The proposed 
requirement that wholesalers expose marketable orders of individual investors to qualified 
auctions might reduce the efficiency with which these orders are filled because the trade 
execution would become less streamlined as a new layer of intermediation would be added to the 
lifecycle of each trade. Even in cases where originating brokers would route customer orders 
directly to qualified auctions, this process could be more complex or time-consuming for retail 
brokers than routing order flow to wholesalers that manage routing, market access and execution 
services.
676
 Any additional complexity or reduction in the speed of execution would tend to 
reduce the efficiency of order executions. However, the duration of the qualified auction would 
be less than or equal to 300 milliseconds,
677
 and the process would be automated, both of which 
would serve to limit the complexity and duration of the qualified auction. Therefore, the 
Commission believes that the overall efficiency with which marketable orders of individual 
investors are executed would not be significantly affected by the Proposal.  
                                                
676
  This is assuming that the wholesalers internalize the routed orders. For those individual investor orders that 
are re-routed by wholesalers, it is possible that directly routing orders to qualified auctions may reduce 
complexity and time-to-execution for retail brokers. 
677
  More specifically, once the proposed qualified auction receives the order and sends out the auction 
message, the duration of the auction is 100 to 300 milliseconds. 

331 
 
 
The Commission believes that the improvements in execution quality for individual 
investors and other market participants
678
 as well as improvements in price efficiency
679
 that 
might result from the Proposal would potentially promote capital formation.  
As investors would benefit from improved execution quality as a result of the proposed 
amendments, these investors would also likely benefit from lower transaction costs. Higher 
transaction costs may hinder customers’ trading activity that would support efficient adjustment 
of prices and, as a result, may limit prices’ ability to reflect fundamental values. Less efficient 
prices may result in some firms experiencing a cost of capital that is higher than if their prices 
fully reflected underlying values, and in other firms experiencing a cost of capital that is lower 
than if their prices accurately reflected their underlying value, as a result of the market’s 
incomplete information about the value of the issuer. This, in turn, may limit efficient allocation 
of capital and capital formation. By improving order execution quality and reducing transaction 
costs, the proposed amendments would reduce financial frictions and promote investor’s ability 
to trade. Furthermore, improvements in price efficiency as a result of the Proposal would cause 
firms’ prices to more accurately reflect their underlying values, which may also improve capital 
allocation and promote capital formation. 
D. Reasonable Alternatives 
A central aim of Proposed Rule 615 is to retain the benefits of segmenting individual 
investor orders. A second concern that this proposal addresses involves the nature of the 
                                                
678
  See supra section VII.C.1.b for a discussion of how the Proposal would improve execution quality for 
individual investors and supra section VII.C.1.c for how the Proposal would improve execution quality for 
other market participants, including institutional investors.  
679
  See supra section VII.C.1.d for further discussion of how the Proposal would increase pre-trade 
transparency and price efficiency. 

332 
 
information transmitted to the market by the originating broker. The first type of reasonable 
alternatives discussed below varies by who can segment, the degree of segmentation, and 
whether prescriptive changes to routing practices are required. The discussion addresses these 
questions with options that vary along degrees of prescriptive rules, versus relying on market 
incentives alone. The Commission also considered additional types of alternatives, namely: (1) 
alternative definitions of segmented orders, (2) alternative auction designs, including the degree 
to which auction design is set by rules or determined by open competition centers, (3) alternative 
exceptions to the order competition requirement, and (4) variation in the definition of open 
competition center. Finally, the Commission also considered alternatives such as mandating 
information barriers within wholesaler business functions, allowing exchanges to display quotes 
in retail liquidity programs, and a separate retail NBBO as well as a disclosure-only alternative. 
These alternatives could be used together or in combination with each other and could also be 
paired with other elements of the Proposal. Where applicable the Commission has specified 
which alternatives would likely be paired together when considering the economic impact of the 
alternative. 
 
 
The first alternative to the Proposal is that the Commission could introduce a trade-at 
prohibition as part of Regulation NMS. A trade-at prohibition would: (1) prevent a trading center 
that was not quoting from price-matching protected quotations and (2) permit a trading center 
that was quoting at a protected quotation to execute orders at that level, but only up to the 
amount of its displayed size. Orders would not be able to be executed at a trading center not 
displaying a quote unless the orders were executed with at least a minimum amount of price 
improvement as established by the Commission. There could be exceptions for trades at the 

333 
 
NBBO midpoint or trades based on a reference price, such as VWAP trades. This would mean 
that any trading center not displaying a quote, including ATSs and wholesalers, could not 
execute a trade unless it offered at least the minimum amount of price improvement over the 
NBBO. Exchanges would still be able to offer separate RLP programs in order to segment the 
marketable orders of individual investors. However, because quotes in RLPs would not be 
displayed, quotes in RLPs would also be restricted from executing orders unless they offered the 
minimum amount of price improvement over the NBBO.
680
 
The Commission could establish a low value for the minimum amount of price 
improvement of 0.1 cent. It could alternatively establish higher values for a minimum amount of 
price improvement ranging up to a full tick size (i.e. 1 cent), with exceptions for midpoint 
executions.
681
 If the Commission chose a higher value for the minimum amount of price 
improvement, then the economic effects of this alternative would be larger (i.e. a greater increase 
in displayed liquidity, a greater share of orders being routed to exchanges, etc.). 
A number of markets have examined the effects of a trade-at rule. Studies have examined 
the introduction of a trade-at prohibition in Canada and Australia. In Canada, results indicate that 
dark trading declined and trading on lit venues increased when the trade-at prohibition was 
imposed.
682
 There were not significant changes in overall spreads or volatility. Displayed depth 
                                                
680
  If this alternative were combined with the alternative to allow exchanges to display quotes in RLPs, then 
displayed quotes in RLPs would be able to execute at NBBO without offering price improvement.  
681
  The Commission also is proposing to amend Rule 612 regarding the tick size. See Minimum Pricing 
Increments Proposal, supra note 98. The Commission encourages commenters to review that proposal to 
determine whether it might affect their comments on this proposing release. 
682
 See Baiju Devani, Lisa Anderson & Yifan Zhang, Inv. Indus. Regulatory Org. Can., Impact of the Dark 
Rule Amendments (May 7, 2015), available at https://paperzz.com/doc/8507782/impact-of-the-dark-rule-
amendments.  

334 
 
increased, but total market depth, i.e., hidden plus displayed depth, did not change.
683
 Some 
measures showed a decline in price efficiency.
684
 Empirical research has also looked at 
differences in trader-types and found that the trade-at prohibition eliminated intermediation of 
individual investor orders in dark venues and shifted individual investor orders onto the lit 
market with the lowest trading fee.
685
 Findings indicate that this resulted in individual investors 
receiving less price improvement, retail brokers paying higher trading fees to exchanges, and 
high-frequency traders earning higher revenues from trading fees.
686
 Using Australian market 
data, researchers found that a trade-at prohibition decreased off-exchange trading and 
internalization, with more off-exchange trades executing at the midpoint.
687
 They also found that 
the trade-at prohibition increased quoted spreads.
688
 However, because these countries had 
different market structures than the U.S. market in NMS stocks (e.g. less fragmentation and less 
trading occurring off-exchange) the effects observed from the trade-at-prohibitions in these 
studies may not be similar if a trade-at-prohibition were applied to NMS stocks in the US. 
The US Tick Size Pilot in NMS stocks imposed a trade-at requirement for one of the test 
groups (Test Group 3), although there were a number of exceptions, including for individual 
investor orders.
689
 One academic paper that examined the effects of the Tick Size Pilot, including 
                                                
683
  Id. 
684
  Id. 
685
  See Carole Comerton-Forde, Katya Malinova & Andreas Park, Regulating Dark Trading: Order Flow 
Segmentation and Market Quality, 130 J. Fin. Econ. 347 (2018). 
686
  Id. 
687
  See CFA Inst., Trade Rules in Australia and Canada: A Mixed Bag for Investors (Nov. 2014), available at 
https://www.cfainstitute.org/-/media/documents/issue-brief/policy-brief-trade-at-rules.ashx. 
688
  Id. 
689
  The Tick Size Pilot Program was an NMS plan designed to allow the Commission, market participants, and 
the public to study and assess the impact of wider minimum quoting and trading increments—or tick 
sizes—on the liquidity and trading of the common stocks of certain small-capitalization companies. The 
Tick Size Pilot began in Oct. 2016 and ended in Sept. 2018. The Tick Size Pilot included NMS common 

335 
 
the effects of the trade-at prohibition,
690
 found that the effects of the trade-at prohibition varied 
based on whether the stock was tick-constrained or unconstrained.
691
 The authors generally 
found that in tick-constrained stocks the trade-at prohibition decreased quoted and effective 
spreads, increased displayed depth at the NBBO, and increased trading volume. In contrast, 
unconstrained stocks did not experience significant changes in spreads or displayed depth and 
experienced a decrease in trading volume. Both tick-constrained and unconstrained stocks 
experienced an increase in quote volatility and a decrease in average trade size. Other empirical 
research indicates that the trade-at prohibition reduced the volume of trading off-exchange, with 
more trading occurring on inverted exchanges (i.e., those exchanges that pay a rebate for 
                                                
stocks that had a market capitalization of $3.0 billion or less, a closing price of at least $2.00, and a 
consolidated average daily volume of one million shares or less (“Pilot Securities”). The Pilot Securities 
were divided into one control group and three test groups. Each test group contained approximately 400 
Pilot Securities and the remaining Pilot Securities were in the control group. The Pilot Securities assigned 
to Test Group One (“TG1”) were quoted in $0.05 per share increments but continued to trade at the current 
price increments, subject to limited exceptions. The Pilot Securities assigned to Test Group Two (“TG2”) 
were quoted in $0.05 per share increments like those in TG1, but were traded in $0.05 per share 
increments, subject to certain exceptions, including exceptions that permit executions that were the (1) 
midpoint between the national or protected best bid and the national or best protected offer, (2) retail 
investor orders with price improvement of at least $0.005 per share, and (3) negotiated trades. The Pilot 
Securities assigned to Test Group Three (“TG3”) were quoted in $0.05 per share increments and traded in 
$0.05 per share increments consistent with TG2. TG3 Pilot Securities were also subject to a Trade-at 
Prohibition, which generally prevented price matching by a trading center that was not displaying the best 
price unless an exception applied. The Trade-at Prohibition had exceptions that were similar to those 
provided in Rule 611 of Regulation NMS. Pilot Securities in the control group continued to quote and trade 
at the current tick size increment of $0.01 per share. See Order Approving the National Market System Plan 
to Implement a Tick Size Pilot Program, Securities Exchange Act Release No. 74892 (May 6, 2013), 80 FR 
27541. 
690
  See Barbara Rindi & Ingrid M. Werner, U.S. Tick Size Pilot (Fisher Coll. Bus. Working Paper No. 2017-
03-018, Charles A. Dice Ctr. Working Paper No. 2017-18, last revised Mar. 17, 2019), available at 
https://ssrn.com/abstract=3041644 (retrieved from Elsevier database) (hereinafter “Rindi and Werner 
(2019)”).  
691
  Rindi and Werner (2019) defined tick-constrained as a stock having an average quoted spread of five cents 
or less during the time period before the Tick Size Pilot was implemented. They define an unconstrained 
stock as one having an average quoted spread of 10 cents or greater during the time period before the Tick 
Size Pilot was implemented. 

336 
 
demanding liquidity and charge a fee for supplying liquidity).
692
 However, the results observed 
from the trade-at-prohibition in the Tick Size Pilot may not be similar if a trade-at-prohibition 
were applied to all stocks, because the Tick Size Pilot was limited to stocks with smaller market 
capitalizations and also involved a simultaneous increase in the tick size to five cents.
693
  
Overall, the Commission believes that a trade-at prohibition would result in more orders 
being routed from ATSs to exchanges and an increase in displayed depth on the LOB compared 
to the Proposal.
694
 However, it is uncertain to what degree total depth would increase because the 
increase in displayed depth could mostly come from market participants choosing to display 
orders they currently hide on LOBs. If most of the increase in displayed depth came from market 
participants choosing to display orders they currently hide, then total depth in the LOB (i.e., 
hidden plus displayed depth) under this alternative may be similar to total depth in the LOB 
under the Proposal. However, LOB depth may increase if OTC market makers that currently 
internalize trades off-exchange increased their liquidity supplied to the LOB in order to be able 
to trade without offering the minimum amount of price improvement.
695
 There is also uncertainty 
about what would happen to spreads under this alternative. Based on the evidence from 
implementing a trade-at rule in other countries, spreads (both quoted and effective) may not 
significantly change compared to the Proposal. However, it is also possible that quoted and 
                                                
692
  See Carol Comerton-Forde, Vincent Grégoire & Zhuo Zhong, Inverted Fee Structures, Tick Size, and 
Market Quality, 134 J. Fin. Econ.141 (2019). 
693
  Additionally, a number of exceptions applied to the Tick Size Pilot trade-at prohibition, including an 
exception for retail orders. 
694
  This may help reverse a decline in pre-trade transparency. Market participants have stated that liquidity 
displayed at or near the NBBO on exchanges has declined over time. An analysis by an exchange 
separately finds off-exchange trading has also increased over a similar time period. See supra notes 375 and 
376 and accompanying text. 
695
  If the minimum pricing increment were larger, then OTC market makers may submit more liquidity to a 
LOB. 

337 
 
effective spreads could decline on exchanges if more orders from individual investors are routed 
for execution to exchange LOBs.
696
 More trading volume (including more orders from 
institutional investors) may also shift from ATSs to exchanges because the trade-at rule may 
prevent ATSs not displaying quotes from executing a trade unless they provide a minimum 
amount of price improvement to the NBBO.
697
 This shift in order flow from ATSs to exchanges 
could increase transparency and may further lower spreads, increase liquidity, and improve price 
efficiency relative to the Proposal. 
Under this alternative, wholesalers would likely internalize more individual investor 
marketable orders compared to the Proposal. However, the threshold the Commission selects for 
the minimum amount of price improvement would affect to what degree wholesalers internalize 
the marketable orders of individual investors.
698
 If the Commission selected a smaller threshold, 
e.g. a threshold of 0.1 cents or 0.2 cents, then this would result in more marketable orders of 
                                                
696
  Because individual investor orders exhibit lower adverse selection risk, the average adverse selection risk 
faced by liquidity suppliers on exchanges could decrease, which may cause them to quote at more 
aggressive prices, resulting in a reduction in quoted and effective spreads. See Glosten and Milgrom (1985) 
for a discussion of how adverse selection risk affects quoted spreads. However it is also possible that this 
effect may be limited if tighter quoted spreads also cause market participants that pose greater adverse 
selection risk to increase their liquidity demanding orders, which could potentially increase the adverse 
selection risk faced by liquidity suppliers on exchange LOBs. 
697
  The shift in volume from ATSs to exchanges would be greater if the Commission set a larger threshold for 
the minimum amount of price improvement needed to execute the order. 
698
  This effect would also vary based on the quoted spread of the stock. For stocks with quoted spreads above 
two cents, even if the minimum threshold price improvement threshold was set at a full tick, wholesalers 
would likely internalize more order flow compared to the Proposal because they would have had to offer 
more than 1 cent of price improvement in order to internalize individual investor orders at the midpoint 
without having to expose them in qualified auctions. If the Commission selected a minimum price 
improvement threshold of a full tick, then stocks with quoted spreads less than two cents may have 
wholesalers internalize less individual investor orders under this alternative compared to the Proposal. 
These effects would vary if the minimum tick size for a stock was different. The Commission also is 
proposing to amend Rule 612 regarding the minimum tick size. See Minimum Pricing Increments Proposal, 
supra note 98. The Commission encourages commenters to review that proposal to determine whether it 
might affect their comments on this proposing release. 

338 
 
individual investors being internalized by wholesalers.
699
 Because these orders would not be 
exposed to order-by-order competition when they are internalized by wholesalers, the average 
price improvement individual investors receive on their marketable orders would likely be 
reduced, and the transaction costs of these orders would be higher, relative to the Proposal. 
Under this alternative, broker-dealers and trading centers would not have the costs 
associated with identifying and handling segmented orders, but they would have additional costs 
associated with developing policies and procedures and adjusting their systems to implement the 
trade-at requirements. 
 
As an alternative to mandating segmented orders be routed to qualified auctions, the 
Commission could allow exchanges to run auctions with 0.1 cent pricing increments that the 
orders of all market participants would be eligible to trade in.
700
 Exchanges would be able to run 
separate auctions for their RLPs and for orders that were not eligible to be submitted to their 
RLPs, which would allow exchanges to maintain some degree of segmentation (alternatively, the 
Commission could permit a greater degree of segmentation as in the alternative below). This less 
prescriptive alternative would allow exchanges to offer sub-penny price improvement to a wider 
set of market participants outside of their RLP programs. As in the trade-at alternative 
considered above, it would maintain the current separation between how market entities are 
allowed to segment orders, and the relative anonymity of orders on exchange. By not 
                                                
699
  The proportion of individual investor order flow internalized by wholesalers would decline as the threshold 
for the minimum amount of price improvement increases, because wholesalers would have to offer more 
price improvement to internalize these orders. 
700
  Currently, exchanges are able to offer smaller pricing increments in their RLPs, but Rule 612 still applies to 
other auctions that they run (e.g. open and closing auctions and auctions following a trading halt). This 
alternative would allow exchanges to offer smaller pricing increments for these other auctions.  

339 
 
contributing to further segmentation of orders, relative to the Proposal, this alternative might 
lower the cost for trading for investors currently identified as having order flow with greater 
price impact. Because broker-dealers and trading centers would not have to establish policies and 
procedures for identifying and handling segmented orders, this alternative would have 
significantly lower costs than the Proposal. However, it offers no clear mechanism for creating 
significantly greater competition for segmented orders, nor in improving execution quality for 
segmented orders as defined in the Proposal. 
 
As a variation on the Trade-at Requirement alternative discussed above, the Commission 
could only establish a trade-at requirement for segmented orders, as defined by the Proposal or in 
combination with an alternative definition of segmented orders as discussed below. This 
alternative would limit both the potential positive and negative effects of the Trade-at alternative 
because it would apply to a smaller set of orders. Relative to the two alternatives above, it would 
maintain the definition of segmented orders, thereby still contributing to the complexity that 
these two alternatives seek to avoid. However, like the Proposal, it would potentially expose 
segmented orders to order-by-order competition. The degree of this competition would depend 
on the minimum price improvement threshold selected because a higher threshold would result 
in less internalization and more routing of orders to exchanges, where they would be exposed to 
order-by-order competition. It would also depend on whether these orders were revealed to be 
segmented orders—given a flag, or sent to an existing RLP program—and whether they also 
identify the originating broker. The less information, the lower the degree of segmentation, 
which may help liquidity in general and segmented orders presenting more adverse selection 
risk, but might limit the ability for segmented orders presenting less adverse selection risk to gain 
price improvement. Unlike the Trade-at Requirement alternative discussed above, this alternative 

340 
 
is explicitly compatible with the provision in the Proposal to prevent a routing broker to post a 
quote in a way that has priority, thereby potentially lessening the information asymmetry and 
increasing competition if it works as intended. 
 
As an alternative, the Commission could introduce the proposed definition of a 
segmented order and permit exchanges to offer separate auction mechanisms for segmented 
orders with finer trading increments, but not introduce a requirement for segmented orders to be 
exposed in these auctions. There would be no minimum trading volume requirement in order for 
exchanges to be able to run these segmented auctions and exchanges would have greater 
flexibility in designing these auctions, similar to the alternative discussed in section VII.D.3.a 
below. Similar to the Proposal, this alternative would introduce the definition of segmented 
orders and with it the additional complexity. Relative to the Proposal, it contains no prescriptive 
requirements for auctions, and thus may have lower costs for implementing them, similar to the 
alternative in section VII.D.1.b. Because more exchanges would be able to offer segmented 
auctions, there may be greater competition among market centers that are able to offer 
segmented auctions compared to the Proposal. 
 
 As an alternative, the Commission could allow national securities exchanges to offer 
separate trading mechanisms for segmented orders in addition to qualified auctions, such as 
allowing exchanges to continue to operate RLPs. In addition to being able to submit a segmented 
order to an exchange LOB or a qualified auction, broker-dealers could also submit a segmented 

341 
 
order to execute in other exchange trading mechanisms designed for segmented orders.
701
 
Separate trading mechanisms for segmented orders could also be priced in 0.1 cents increments, 
but, similar to current market practices, quotes in exchange RLP programs would not be 
displayed in exchange proprietary feeds or consolidated market data.
702
  
 Compared to the Proposal, this alternative might improve competition among exchanges, 
and improve the competitive position of lower-volume exchanges, because they would be 
allowed to offer trading mechanisms for segmented orders even if they fell below the 1% 
average daily volume requirement necessary to run a qualified auction. This might result in less 
trading volume in segmented orders concentrating on larger exchanges, which could reduce the 
risk that one or more small exchanges might exit the market. It would also improve the ability of 
market participants that might not possess the speed necessary to respond to qualified auction 
messages, e.g., individual investors or professional traders that do not utilize algorithmic trading 
technology, to compete to supply liquidity to segmented orders. There may be more methods 
available for them to supply liquidity to segmented orders that do not require the speed necessary 
to respond to qualified auction messages, such as posting quotes in exchange RLP programs.
703
 
  However, compared to the Proposal, this alternative may increase the ability of 
wholesalers or other broker-dealers handling segmented orders to indirectly internalize an order 
                                                
701
  Exchanges could either adjust the definitions of orders they accepted to their RLPs to conform with the 
definition of segmented orders or they could allow a broader set of individual investor orders of which 
segmented orders would be a subset. 
702
  A flag would still be disseminated next to an exchange quote in consolidated market data indicating that 
there was liquidity present in an exchange’s RLP program at a price better than the NBBO. 
703
  If an exchange operated both a qualified auction and an RLP program, liquidity supplying orders submitted 
to the exchange’s RLP program could be incorporated into qualified auctions. Because they could submit 
resting orders to RLP programs, liquidity suppliers that were not fast enough to submit bids in qualified 
auctions would still be able to submit an order in 0.1 cent pricing increments that would only supply 
liquidity to a segmented order. However, they may not be able to factor in information on the originating 
broker submitting the segmented order into the liquidity supplying orders they submit to qualified auctions. 

342 
 
by executing it against a quote they are posting in another trading mechanism for segmented 
orders, such as an RLP program. In these other trading mechanisms, the broker-dealer may 
maintain a larger information advantage than it would have with qualified auctions, because 
these other trading mechanisms may not require identity disclosure of the originating retail-
broker. However, since qualified auctions would still be available and there may be additional 
competition from liquidity on smaller exchanges, the average price improvement and trading 
costs for marketable orders of individual investors may not be significantly different under this 
alternative compared to the Proposal. 
 This alternative could also allow quotes in RLPs to be displayed in proprietary feeds and 
in consolidated market data. This would potentially increase the transparency of liquidity 
available to segmented orders and may further improve their order routing and execution quality 
compared to not displaying RLP quotes under this alternative. Displaying quotes in RLP 
programs may also further enhance the competitive position of smaller exchanges and new 
exchanges that enter the market that do not meet the criteria for an open competition trading 
center but may operate an RLP. Displaying exchange RLP quotes would provide more 
transparency into the liquidity available to the orders of individual investors on these exchanges, 
which might result in more individual investor orders being routed to these exchanges when the 
prices of displayed quotes are equal to or better than the expected execution prices individual 
investor orders may expect to receive in qualified auctions (e.g., if the RLP is posting a quote at 
the NBBO midpoint).  

343 
 
 
 
The Commission understands that current market practices concerning definitions of 
retail orders often relies on brokers representing retail flow as coming from natural persons.
704
 In 
addition, a number of SRO rules prohibit the use of trading algorithms or computerized 
technology for the eligibility of retail orders for their RLP programs.
705
 As an alternative to the 
proposed definition of segmented order, the Commission could adopt a definition of segmented 
order that consisted of these two elements, i.e., the order must be submitted by a natural person 
and does not originate from a trading algorithm or any other computerized methodology,
706
 but 
without any thresholds based on the number of trades executed or orders submitted by the 
account.  
Compared to the Proposal, this could result in fewer orders meeting the definition of a 
segmented order. Although a small number of additional individual investor accounts would now 
meet the definition of segmented order because there would be no minimum trade threshold,
707
 a 
number of orders that previously would have been included under the Proposal could be 
excluded because they originate from a trading algorithm or any other computerized 
methodology.
708
 The Commission does not have data on how many retail orders originate from 
                                                
704
  See supra notes 188, 189, and 190 and related discussions (discussing natural person in context of 
definitions of retail orders) 
705
  See supra note 193 (discussing restrictions on retail orders originating from a trading algorithm). 
706
  Similar to the proposed definition 600(b)(91)(i), the order could originate from a natural person or an 
account held in legal form on behalf of a natural person or group of related family members. 
707
  See analysis and discussion of the distribution of individual investors’ average daily number of orders 
resulting in a trade in infra Table 22. 
708
  It is also possible that the orders from individual investor accounts that average 40 or more trades a day 
could also be excluded under this alternative if the orders originate from a trading algorithm or any other 
computerized methodology. 

344 
 
trading algorithms or any other computerized methodology, but the Commission understands that 
a number of retail brokers allow individual investors to trade through APIs and that a number of 
retail brokers may use trading algorithms to generate orders for individual accounts.
709
 To the 
extent that orders originating from a trading algorithm or computerized methodology have larger 
adverse selection risk than other orders originating from individual investors that met the 
definition of a segmented order, then the adverse selection risk of segmented orders in qualified 
auctions may decrease and liquidity suppliers might offer slightly greater price improvement to 
segmented orders in qualified auctions under this alternative compared to the Proposal. The costs 
to originating brokers for identifying segmented orders under this alternative may be similar to 
the Proposal.
710
 
 
Rather than using average number of trades, the Commission could rely on an alternative 
metric, such as average number of orders submitted by an individual investor’s account to 
identify the threshold for the definition of segmented orders. The Commission understands that 
some exchanges in the options market have designed definitions of retail orders that rely on a 
criteria based on the average number of orders an account originates per day, as opposed to the 
average number of trades.
711
 
                                                
709
  For example, if a retail broker has automated methods for rebalancing an individual investor’s account, it 
may generate orders using a trading algorithm. 
710
  Although originating brokers may not need to keep track of the average number of trades each individual 
investor account executes under this alternative, they would need to have systems to track if an order 
submitted by an account originated from a trading algorithm or computerized methodology.  
711
  See supra note 197 for a discussion of how the average number of orders submitted per day from a 
customer’s account is included in the definition of a “Professional” order. 

345 
 
The economic effects of using an average order threshold would largely depend on the 
threshold selected. If the Commission selected an average order threshold that corresponded to a 
similar percentage of accounts being excluded as the proposed trade threshold, i.e., if the 
Commission selected an average orders per day cutoff so that 99.9% of individual investor 
accounts were below the threshold, then the economic effects of this alternative would likely be 
similar to those described in the Proposal. If the Commission varied the threshold, then the 
economic effects would likely be similar to the effects of varying the average trade threshold 
discussed below in section VII.D.2.c. Similar to the Proposal, originating brokers would have to 
develop systems to identify individual investor accounts that meet definition of a segmented 
order. However, these costs may be higher if it is more difficult for an originating broker to 
develop systems that track the average number of orders that originate from a customer’s account 
compared to the number of trades. 
 
 The Commission could adopt alternative definitions of a segmented order by varying the 
threshold for the average daily number of trades in NMS stocks that a natural person or group of 
related family members would need to be under in order for their orders to qualify as segmented 
orders, including not having a maximum number of trades per day threshold.
712
 
Table 22 estimates the distribution of the average daily number of orders that an 
individual investor’s account originates and results in a trade (conditional on the individual 
                                                
712
  If there were no trade threshold, then the segmented order definition would be similar to the criteria that 
some exchanges use to determine which investor orders are eligible to execute in their RLP programs. 
Although some exchanges also have criteria using the average number of orders submitted by the natural 
person as a threshold for determining which orders are eligible to be submitted to their RLP programs. See 
supra note 188 and accompanying text for discussions of the orders that are eligible to be submitted to 
RLPs.  

346 
 
investor submitting an order during the observation period). The analysis shows that 99.9% of 
individual investor accounts average 14.3 or fewer orders that result in a trade each day and that 
99% of individual investor accounts average 1.86 or fewer orders that result in a trade each day.  
Table 22: Distribution of Individual Investors’ Average Daily Number of Orders Resulting in a Trade 
Mean Std Min 25% 50% 75% 99% 99.9% 99.99% 99.999% Max 
0.20 118.74 0.00 0.01 0.02 0.06 1.86 14.30 83.92 318.83 667,289.34 
This table uses CAT data to estimate the distribution of the average daily number of orders that an individual 
investor’s account originates and are associated with a trade. This is estimated from CAT identified Individual 
Customer accounts that originated an order during the six month period from Jan. 1, 2022, through June 30, 2022. 
Because this analysis only includes Individual Customer Accounts that originated an order during this time period, it 
may overestimate the value at a given percentile because accounts originating zero orders are not included in the 
distribution. See supra note 194 for additional details on the analysis. 
If the average trade threshold were lowered, fewer individual investors would meet the 
definition of a segmented order and be eligible to have their orders be routed to qualified 
auctions. Individual investors that no longer met the definition of segmented orders would 
experience lower execution quality than under the Proposal because their orders would not be 
eligible to be segmented and participate in qualified auctions. Instead, these orders would likely 
either be internalized by wholesalers without being subject to order by order competition if they 
have lower adverse selection risk or routed and executed on an exchange LOB or ATS if 
wholesalers don’t want to internalize them. If these orders have larger adverse selection risk than 
the average orders of individual investors that fall below the average trade threshold, then the 
average adverse selection risk of segmented orders in qualified auctions may decrease and 
liquidity suppliers might offer slightly greater price improvement to segmented orders in 
qualified auctions under this alternative compared to the Proposal. However, as long as the 
average trade threshold remained above 15 trades per day, then the effects of this alternative may 
not be that significant, because it would affect less than 0.1% of individual investors.  

347 
 
If the average trade threshold were increased or eliminated, then orders of more 
individual investors would be included in qualified auctions. However, the proportion of 
individual investors that meet the definition of segmented orders under this alternative, but do 
not under the Proposal would be small because more than 99.9% of individual customer accounts 
average less than 40 trades per day. The marketable orders of individual investors that average 
more than 40 trades per day and meet the definition of segmented order under this alternative 
may receive more price improvement and lower transaction costs compared to the Proposal 
because their orders would now be eligible to be included in qualified auctions. However, the 
orders of these individual investors that trade more frequently may have greater adverse selection 
risk compared to orders from individual investors that trade less frequently. Compared to the 
Proposal, this may result in the average adverse selection risk increasing in qualified auctions 
and liquidity suppliers bidding in auctions may offer less price improvement on average. This 
would result in the orders of individual investors that average less than 40 trades per day 
receiving less price improvement on their marketable orders and paying higher transactions costs 
than they would under the Proposal. This would effectively result in a transfer from individual 
investors that average less than 40 trades per day to the ones that average more than 40 trades per 
day. Institutional investors may also see increased transactions costs compared to the Proposal 
because they may be more likely to supply liquidity to individual investors with higher adverse 
selection risk. However, if individual investors with more than 40 trades per day are limited to a 
few broker-dealers, then the potential disclosure of the originating broker in qualified auctions 
may limit the effect to these broker-dealers. 

348 
 
 
 
As one alternative, the Commission could allow open competition trading centers more 
flexibility in designing qualified auctions. This would include allowing open competition trading 
centers more flexibility in setting matching protocols, priority structure, auction duration, 
disclosure of the identity of the originating broker, and auction fees and rebates. However, the 
Commission could still specify a minimum auction duration (open competition centers could 
choose greater times). The Commission could also still specify that execution priority shall not 
be based on time of receipt of the auction response (otherwise, it is not clear how an auction 
might differ significantly from the limit order book). 
Compared to the Proposal, this alternative could lead to greater innovation in the design 
of qualified auctions and foster greater competition among open competition trading centers that 
run qualified auctions. However, it could also lead to the design of qualified auctions with 
mechanisms that could provide a greater advantage to certain liquidity suppliers, which could 
result in less competition among liquidity suppliers, and reduced benefits that come from it, 
including less improvement in individual investor and institutional investor execution quality 
compared to the Proposal.  
Allowing more flexibility in the design of qualified auctions could enhance innovation 
compared to the Proposal by allowing open competition trading centers to incorporate auction 
features that better fit the needs of different market participants, which in turn could improve 
order execution quality for some market participants compared to the Proposal. More flexibility 
in the design of qualified auctions could also promote further competition among open 
competition trading centers and lead to greater differentiation among qualified auction 

349 
 
mechanisms in order to attract segmented orders and liquidity suppliers. It could also lead to 
more open market trading centers operating qualified auctions, since an exchange group might be 
more likely to operate multiple qualified auctions if it has the flexibility to implement different 
designs at different exchanges. This, however, could result in greater fragmentation of individual 
investor order flow and liquidity supply across qualified auctions compared to the Proposal and 
result in decreased competition among liquidity suppliers to individual qualified auctions and 
less price improvement for individual investors relative to the Proposal. 
Compared to the Proposal, allowing greater flexibility in qualified auction designs could 
result in some open competition trading centers designing auction mechanisms that provide a 
greater competitive advantage to some types of bidders over others. For example, an open 
competition trading center could design an auction that includes an auto-match pricing feature 
(where the order automatically adjusts to match the price of the best auction bid), and an 
allocation guarantee to the participant that initially brought the order to the auction if it provided 
the best bid. This would provide a competitive advantage to whichever market participant 
brought the order to the auction and increase the likelihood that it would trade with the individual 
investor order. This could result in market participants directing individual orders to qualified 
auctions that offered them a greater competitive advantage, which would result in less 
competition among market participants to supply liquidity to individual investor orders and 
worse execution quality for individual investor orders compared to the Proposal. 
Additionally, because this alternative would not require qualified auctions to ensure 
customer priority if multiple bids are at the same price, it could reduce the likelihood of other 
investors trading directly with individual investor orders compared to the Proposal (e.g., it could 
increase the chance of broker-dealers bidding in qualified auctions getting priority over 

350 
 
institutional orders at the same price compared to the Proposal). This could result in less 
improvement in the execution quality for the orders of institutional investors compared to the 
Proposal.
713
  
 
 As an alternative, the Commission could vary the minimum and maximum durations for 
the qualified auction, making both larger or smaller. Variations in the duration of qualified 
auctions results in a trade-off between NBBO slippage and the exposure of the auctioned order 
flow to potential bidders. Because the NBBO may vary over short time horizons, auctioned 
orders may become stale or priced outside the NBBO as best quotes move. This effect calls for 
shorter auction durations. However, longer auction durations provide a longer opportunity, after 
observing the auction message through the SIP, for other participants to interact with the 
auctioned order flow, potentially raising the number of bidders in qualified auctions. 
The Commission performed analysis to estimate the risk of quote slippage for different 
auction lengths by observing the likelihood that that the NBBO spread moves (i.e., the “fading 
probability”) as the time lag increases (in milliseconds) after internalization of an individual 
investor order.
714
 Research indicates there is a few-millisecond gap between an off-exchange 
trade and the reporting of that trade to the SIP.
715
 Assuming this lag applies to internalized 
individual investor orders as well, NBBO movements were measured during the initial moments 
                                                
713
  See supra section VII.C.1.c discussing improvements in execution quality for institutional investors. 
714
  From Daily TAQ’s NBBO and Quote files, NBBO updates are constructed based on nanoseconds time-
stamps. Each quote update is matched up with the NBBO that is in effect for different durations of time (in 
milliseconds) after internalization. These durations include 25, 50, 75, 100, 200, 300, and 500 milliseconds. 
715
  See Thomas Ernst & Chester S. Spratt, Payment for Order Flow and Asset Choice (last revised May 16, 
2022) (unpublished manuscript), available at https://ssrn.com/abstract=4056512 (retrieved from Elsevier 
database). 

351 
 
following internalization of an individual investor order. This analysis is performed on 600 
randomly selected stocks that are divided into three groups: high, medium, and low activity 
stocks.
716
 The probability of fading is calculated at the stock level as the overall likelihood that 
the NBO (NBB) will be higher (lower) than the current NBO (NBB) for increasing durations of 
time after internalization. These probabilities are then averaged across stocks in each of the three 
groups of stocks. Figure 1 below indicates slippage probabilities for different periods of delay 
after internalization:
717
 
                                                
716
  Six hundred stocks were randomly selected from the population of all NMS common shares and ETFs in 
Mar. 2022. Three buckets were formed from the population of stocks based on trading volume: top-500 
(high activity), 501-1,000 (medium activity), and 1,001-3,000 (low activity). Then 200 stocks were 
randomly selected from each bucket in a stratified manner, such that the final sample included stocks from 
all levels of quoted spread. 
717
  Filters were used to identify off-exchange transactions (sub-penny trades) that are attributable to individual 
investors. An algorithm from Boehmer et al., supra note 572, was then used to identify buyer vs. seller 
initiated such trades. See supra note 572 for further discussions of this algorithm. 
 

352 
 
Quote updates; high-activity stocks Sub-penny retail executions; high-activity stocks 
  
Quote updates; medium-activity stocks Sub-penny retail executions; medium-activity stocks 
 
 
Quote updates; low-activity stocks Sub-penny retail executions; low-activity stocks 
 
 
Figure 1: Probability of NBBO Quote Fade following Quote Updates and Sub-Penny Off-Exchange 
Executions 
Probabilities are estimated from NYSE TAQ data in Mar. 2022 for a sample of 600 stocks that were randomly 
selected from the population of all NMS common shares and ETFs.  
Results indicate that the fade probability goes from a cross-stock average of 12% at 25 
milliseconds after a quote update, to 14% at 100 milliseconds—an increase of only 2 percentage 
points. Focusing on individual investor orders, the fade probability goes from an average of 1.7% 
at 25 milliseconds after an internalized individual investor order, to 2.9% at 100 milliseconds—
an increase of only 1.2 percentage points.  

353 
 
These findings suggest that changing qualified auction lengths relative to the proposed 
100 milliseconds length would not significantly change the chance of “adverse” price 
movements when an auction message is disseminated. The Commission believes, based on this 
analysis, that the chance of the quotes moving against the individual investor order does not 
significantly increase over horizons from 20 milliseconds to 500 milliseconds long. However, the 
Commission observes that the likelihood of slippage may be greater in volatile markets. 
In addition to the low risk of slippage within the Proposal’s auction durations, the 
Commission does not believe that changing the qualified auction length would materially 
substantially impact the number of potential bidders. Trading algorithms used by most market 
participants may be fast enough to respond to an auction message in the SIP in 10 milliseconds, 
so reducing or increasing the auction length from the proposed 100 to 300 millisecond range may 
not have a significant effect on the number of bidders. The Commission also observes that, even 
at 1 second most traders using screens would not be fast enough to participate, limiting the 
additional market participants that could potentially join the auctions as bidders. However, 
auctions below 10 milliseconds may prevent some participants that utilize algorithms from 
responding timely to SIP auction messages. These limitations likely reflect geographical delay in 
the SIP, which is estimated to be up to one millisecond between trading centers in New York and 
New Jersey and up four milliseconds from Chicago to New York/New Jersey.
718
 
 
The Proposal sets the minimum pricing increment at 0.10 cents in a qualified auction. As 
an alternative, the Commission could lower the minimum pricing increment requirement to 0.01 
cents in the qualified auctions. Concern about a minimum pricing increment tends to occur 
                                                
718
  See MDI Adopting Release, supra note 81, note 1692 and accompanying text. 

354 
 
around pennying on a limit order book, which economically acts as an erosion of time priority. 
However, auctions as required do not have time priority, and so this is less of a concern. 
Lowering the minimum pricing increments would allow bidding at more competitive prices. It 
could, however, increase the possibility of de minimis price improvement relative to the limit 
order book. This would drain liquidity from the limit order book with little benefit to investors. 
Varying the minimum pricing increment could affect the competitiveness among liquidity 
suppliers in qualified auctions and also the potential price improvement that segmented orders 
may receive. 
 
 As another alternative, the Commission could require qualified auction operators to have 
a designated liquidity provider (DLP) for each security to serve as a backstop and guarantee 
execution of a portion of the segmented order at the NBBO if an auction does not produce any 
bids. For each symbol, the number of shares a DLP would be obligated to guarantee execution 
for in an order could be set at the minimum of some percentage of the average quoted size at the 
NBBO or some percentage of the average daily executed share volume, whichever is smaller.
719
 
In return for the DLP backstopping the qualified auction, if the DLP were tied with other bidders 
at the best price, the DLP would be given an allocation guarantee of some percentage of the size 
of the segmented order or the size of their bid, whichever is smaller.
720
 If there were multiple 
bidders besides the DLP at the best price, each liquidity supplying order at the same price level 
would be assigned a random priority and, after the DLP received its allocation guarantee, any 
                                                
719
  For example, the Commission could require the DLP to guarantee execution of a number of shares that 
would be equal to 25% of the average quoted size at the NBBO in a security or 0.1% of the average daily 
executed share volume in a security, whichever is smaller. 
720
  For example, the Commission could guarantee that a DLP would have priority to execute 25% of the shares 
in the segmented order if it were tied with other bidders at the same price. 

355 
 
remaining shares would be filled based on the random priority ranking. However, qualified 
auction features that gave the DLP additional advantages, such as allowing it to automatically 
match the best price, would not be allowed.  
Compared to the Proposal, this alternative would provide more certainty regarding 
individual investor orders executing in qualified auctions, particularly in less liquid securities 
where there may be a higher chance that no liquidity suppliers bid in the auctions. This execution 
certainty would be greater if the DLP’s percentage execution guarantee were higher. However, 
the DLP would also be taking on greater risk, because they might have a larger inventory 
position, which would put them at greater risk if prices moved against them.  
Giving allocation guarantees to DLPs may reduce the incentive for other market 
participants to compete to supply liquidity to segmented orders compared to the Proposal, 
because they would be less likely to execute against the segmented order if they submitted an 
order at the same price as the DLP.
721
 The incentives of other market participants to compete to 
supply liquidity may be reduced more if the percentage of the segmented order the DLP is 
guaranteed priority to execute (i.e., the DLPs allocation guarantee) is greater.  
 
Under this alternative, qualified auction messages would not include information on the 
direction of the segmented order (i.e., whether it was a buy or sell order). Bidders would be able 
                                                
721
  The reduction in incentives to compete to supply liquidity to segmented orders compared to the Proposal 
may be larger for customer orders, including the orders of institutional investors, because, in addition to the 
DLP allocation guarantee, the random priority structure would further reduce their chance of executing 
against an order when their order is tied with others at the same price compared to the Proposal (in which 
customer orders had priority in the event of a tie).  

356 
 
to submit a one sided bid (i.e., a directional bid to either buy or sell) or a two sided bid (i.e., a bid 
indicating the bidder was willing to both buy and sell).
722
 
On the one hand, not disclosing the direction of the segmented order may reduce bidding 
from some market participants,
723
 potentially resulting in less competition to supply liquidity to 
the segmented order, which may result in segmented orders receiving less price improvement 
compared to the Proposal. On the other hand, not disclosing the direction of the segmented order 
may also reduce the risk of information leakage if an institutional investor was bidding in the 
auction compared to the Proposal, because it would be more difficult to discern the direction of 
the trade.
724
 This could incentivize more bids from institutional investors, which could increase 
the competition to supply liquidity to segmented orders and potentially provide more 
improvement in institutional investor execution quality compared to the Proposal.  
Not disclosing the direction of the segmented order may also reduce the risk of the 
NBBO slippage during the qualified auction, i.e., the risk of the NBBO quotes moving against 
the individual investor order (e.g., the probability of an increase in the NBO for a segmented buy 
order or a decrease in the NBB for a segmented sell order).
725
 Because market participants 
setting the NBBO quotes would not know the direction of the segmented order, to the extent they 
                                                
722
  A two sided bid could be submitted as providing some sort of price improvement over the NBBO. For 
example, a market participant supplying liquidity in the qualified auction could submit a two-sided 
response specifying that they were willing to execute the segmented order (i.e., they were willing to both 
buy and sell to the individual investor) at 0.2 cents better than the NBBO. 
723
  For example, not knowing the direction of the segmented order may reduce the willingness of some market 
participants to cancel a resting order with queue position on another venue and submit it as a bid in the 
qualified auction because it is more difficult to know if their order was going to execute.  
724
  See supra section VII.C.2.f for a discussion on the risk of information leakage from institutional investors 
supplying liquidity in qualified auctions. 
725
  See supra section VII.C.2.b for a further discussion on individual investor slippage costs in qualified 
auctions. 

357 
 
would have adjusted their quotes in response to an auction announcement under the Proposal, 
they may be less likely to adjust their quotes under this alternative.  
 
The Proposal imposes a 5 mil access fee cap on executed auction responses and does not 
allow a fee to be charged for submitting auction responses or the submission or execution of 
segmented orders. The alternative discussed in section VII.D.3.a allows more flexibility in 
designing auctions, which could include more flexibility for exchanges to charge greater fees 
(and offer greater rebates), both from those routing orders to an exchange and from those bidding 
in an exchange. As exchanges compete to offer auctions, it is possible that access fees would be 
competed down to levels that make a cap unnecessary. However, because the auctions are 
required for certain segmented orders prior to internalization, there remains the possibility that 
this requirement could lead to access fees being set above those that would occur in the absence 
of such a requirement. Due to this market failure, setting a maximum fee may be necessary. 
Alternatively the Commission could raise the 5 mil qualified auction access fee cap to, for 
example, 10 mils, and could allow a capped fee on auction respondents and on those routing 
segmented orders to qualified auctions. This could raise the access fees charged to auction 
responses and lower the price improvement received by segmented orders, but it would raise the 
incentives for exchanges to offer auctions.  
 
 The Proposal currently requires qualified auctions to give priority to auction responses 
for the account of a customer over auction responses for the account of a broker or dealer at the 
same price. Under this alternative, the Commission could not specify priority rules requiring 
giving priority to customer auction responses. The Commission could still maintain priority 

358 
 
restrictions prohibiting time priority and prohibiting priority rules favoring the broker-dealer that 
routed the segmented order to the auction, the originating broker for the segmented order, the 
open competition trading center operating the auction, or any affiliate of the foregoing 
persons.
726
 Additionally, the Commission could also still maintain the proposed priority rules 
regarding how qualified auctions would interact with the continuous limit order book.
727
 
 While one of the goals of the Proposal is to promote the NMS objective set forth in 
section 11A(a)(1)(C)(v) of the Exchange Act and maximize the potential for customer orders to 
interact with other customer orders,
728
 giving priority to customer orders may discourage 
liquidity provision by broker-dealers in qualified auctions. Compared to the Proposal, this 
alternative could encourage greater participation by traditional liquidity providers, such as 
exchange market makers and other OTC dealers, in qualified auctions. However, it might 
discourage other customers, including institutional investors, from participating in qualified 
auctions, which may be contrary to one of the goals of the proposal.  
 
 As an alternative, the Commission could not permit the identity of the originating broker 
to be disclosed in qualified auction messages. If the identity of the originating broker were not 
revealed to bidders in qualified auctions, then they would need to price their auction responses 
based on the average adverse selection risk of the segmented orders in the qualified auctions. 
 Relative to the proposal, this has the potential to improve pricing and liquidity for the 
individual investor orders from retail brokers presenting greater adverse selection risk, thereby 
                                                
726
  See supra section IV.C.5 for further discussions on these priority restrictions. 
727
  See id. (discussing proposed Rule 615(c)(5)(v)). 
728
  See id. (discussing proposed Rule 615(c)(5)(ii)). 

359 
 
increasing incentives for information production and potentially improving price efficiency. 
However, it may also potentially reduce the price improvement and increase transaction costs for 
individual investor orders of retail brokers presenting lower adverse selection risk, since their 
orders could not be distinguished from the orders of customers of retail brokers that imposed 
greater adverse selection risk. Additionally, if wholesalers continue to route segmented orders 
and bid in qualified auctions, then they would have a larger information advantage relative to 
other participants in qualified auctions because they would be aware of the identity of the 
originating broker of a segmented order they submit to the qualified auction. This could reduce 
the incentives of other market participants to supply liquidity in qualified auctions, because they 
may be more likely to suffer from winner’s curse, i.e., they would be more likely to only win 
qualified auction in which the wholesaler submitting the segmented order to the auction didn’t 
want to bid aggressively because the individual investor order posed greater adverse selection 
risk. This could reduce competition among liquidity suppliers in qualified auctions and result in 
less price improvement and higher transactions costs for segmented orders compared to the 
Proposal. 
 
 
 As an alternative, the Commission could consider varying the proposed $200,000 
threshold of the order dollar value exception for having to expose a segmented order in a 
qualified auction by either increasing or decreasing the threshold. Table 23 estimates the 
distribution of the dollar value of executed orders submitted by individual investors. 
Approximately 98.9% of individual investor orders have a dollar value less than $200,000 and 
more than 95% of individual investor orders have a dollar value less than $55,000. Therefore, 

360 
 
unless the proposed order dollar value exception threshold is reduced significantly, the vast 
majority of individual investor orders would remain below the threshold level. Similarly, 
increasing the threshold level would not significantly increase the percentage of orders that 
would be required to be exposed in qualified auctions. 
Table 23: Distribution of Dollar Value of Orders Submitted by Individual Investor 
10 Pct 25 Pct 50 Pct 75 Pct 90 Pct 95 Pct 99 Pct 
$21.21 $136.13 $1,019.01 $6,232.51 $25,243.63 $54,728.69 $209,281.75 
This table presents analysis of CAT data showing the distribution of the original dollar value of orders that 
resulted in trades and originated from CAT Individual Customer accounts at one of the 58 MPIDs in the CAT 
retail analysis identified in Table 7 during March 2022. The distribution is calculated from all market and limit 
orders that originated from CAT Individual Customer accounts and resulted in a trade. Dollar values for limit 
orders were calculated based on the limit price of the order (limit price times shares in the order). Dollar values of 
market orders were calculated based on the far side NBBO quote at the time of order entry and then multiplying 
that by the number of shares in the order. The execution price was used in the rare instances when the NBBO 
wasn’t available. See supra Table 7 for details on how the broker-dealers were identified.  
A smaller threshold value would result in more segmented orders potentially being 
excepted from qualified auctions. Orders above this value and below $200,000 would be more 
likely to not be exposed in a qualified auction and would instead be more likely to be 
internalized by a wholesaler without the wholesaler being subject to competition at the individual 
order level. This may decrease price improvement offered to these orders compared to the 
Proposal. It would also reduce the chance that other market participants could interact with these 
individual investor orders, potentially increasing their transaction costs compared to the 
Proposal. However, it may also result in less of a reduction in wholesaler revenue compared to 
the Proposal, which may result in wholesalers not reducing PFOF as much. It may also increase 
the likelihood of wholesalers continuing to not charge retail brokers for their routing services. 
Both of these changes may also reduce the chance retail brokers would resume charging 
commissions compared to the Proposal. 

361 
 
 A larger threshold value would result in more individual investor orders potentially being 
included in qualified auctions. This could result in more individual investors orders over 
$200,000 receiving greater price improvement compared to the Proposal, because they would be 
more likely to be exposed in qualified auctions. However, this benefit may be limited, because 
the auctions may be less likely to attract sufficient liquidity to fill the entire order. 
 
 As another alternative, the Commission could create an additional exception to Proposed 
Rule 615 that would apply to all segmented orders that were classified as non-marketable limit 
orders at the time of order receipt. Proposed Rule 615 includes beyond-the-midpoint non-
marketable limit orders but exempts non-marketable limit orders with limit prices at and below 
the midpoint. Under this alternative, beyond-the-midpoint non-marketable limit orders that met 
the other criteria to be considered a segmented order would also be exempted from Proposed 
Rule 615. 
Table 24 below provides a break-down of the share of different order types for individual 
investors during Q1 2022. The data indicates that beyond-the-midpoint non-marketable orders 
only accounted for 1.9% of the executed dollar volume of orders individual investors routed to 
wholesalers.
729
 Furthermore, only 17.7% of the dollar volume in these orders were executed in a 
principle capacity, equaling 0.3% of total executed dollar volume.
730
 Thus, the share of non-
marketable limit orders that is currently isolated at the order-by-order level is an extremely small 
share of overall individual investor order flow.  
                                                
729
  Over 95% of the executed dollar volume individual investors routed to wholesalers came from marketable 
orders.  
730
  The majority of the executed dollar volume in beyond-the-midpoint non-marketable orders was executed in 
a riskless principal capacity or was rerouted and executed on an agency basis. 

362 
 
Table 24: Distribution of Individual Investor Order Types, Q1 2022 
Order Type 
Share of dollar trading 
volume 
(%) 
Marketable Order (% of total) 80.6% 
Marketable Orders - Principle Execution (% of total) 73.5% 
Principle Share % of Marketable Orders 91.1% 
  
 
Marketable Limit Orders (% of total) 14.7% 
Marketable Limit Orders - Principle Execution (% of total) 12.7% 
Principle Share % of Marketable Limit Orders 86.4% 
  
 
Beyond-the-Midpoint Non-Marketable Limit Orders (% of total) 1.9% 
Beyond-the-Midpoint Non-Marketable Limit Orders - Principle Execution (% of total) 0.3% 
Principle Share % of Beyond-the-Midpoint Non-Marketable Limit Orders  17.7% 
  
 
Midpoint or below Non-Marketable Limit Orders (mp and farside) (% of total) 2.8% 
Midpoint or below Non-Marketable Limit Orders (mp and farside) - Principle Execution (% of total) 0.3% 
Principle Share of Midpoint or below Non-Marketable Orders (mp and farside) 10.5% 
  
This table looks at the percentage of dollar trading volume in NMS stocks and ETFs of different market and limit (as measured 
by marketability) order types that were routed to wholesalers from the 58 broker-dealer MPIDs in the CAT retail analysis in Q1 
2022. See supra Table 7 for additional information on the sample.  
The analysis shows the order type’s percentage of dollar trading volume, i.e. the dollar trading volume belonging to a particular 
order type (out of the total dollar trading volume across all order types). The Principle Execution for an order type is the 
percentage of dollar trading volume executed in a principal capacity by a wholesaler belonging to a particular order type (out of 
the total dollar trading volume executed in a principal capacity by a wholesaler across all order types). The Principle Share %  
for a particular order type is the percentage of dollar trading volume that was executed by a wholesaler in a principal capacity 
(out of the total dollar trading volume in that order type). 
Marketability of a limit order was determined using the NBBO from the consolidated market data feed at the time the 
wholesaler received the order. Marketable limit orders are limit orders where the limit price is greater than or equal to the 
opposite side quote (NBB for sell orders and NBO for buy orders). Beyond-the-midpoint Non-marketable limit orders are limit 
orders with limit prices between the midpoint and the opposite side quote (NBB for sell orders and NBO for buy orders). 
Midpoint or below non-marketable limit orders are limit orders with limit prices between the midpoint and the same side quote.  
Given the small volume of beyond-the-midpoint non-marketable limit orders, the costs 
and benefits of this alternative could be similar to the Proposal. However, fewer beyond-the-
midpoint non-marketable limit orders would be submitted to qualified auctions. Instead, more of 

363 
 
them may be internalized or executed on a riskless principal basis, which may reduce the price 
improvement they receive relative to the Proposal.
731
 
 
 
 In addition to other requirements, the Proposal requires a trading center to have an 
average daily share volume of 1.0 percent or more of the aggregate average daily share volume 
for NMS stocks during at least four of the preceding 6 calendar months in order to qualify as an 
open competition trading center. As an alternative, the Commission could choose to require a 
higher or a lower percentage, including zero percent, of the average daily share volume in NMS 
stocks as the threshold to qualify as an open competition trading center. 
 If the threshold were higher, then fewer exchanges and ATSs would meet the definition 
of an open competition and be eligible to run qualified auctions. It could result in reduced 
competition between venues running qualified auctions. This may reduce innovation and, to the 
extent it occurs within the 5 mil fee and rebate caps, result in reduced competition between 
qualified auctions on the basis of access fees and rebates, which could increase the net capture 
rate open competition centers earn from their qualified auctions. However, the reduced number 
of qualified auctions could result in more liquidity suppliers competing in individual qualified 
auctions (i.e., there would be less fragmentation of liquidity suppliers across qualified auctions), 
which may provide more price improvement to segmented orders submitted to these auctions.  
                                                
731
  Both the Proposal and this alternative would allow beyond-the-midpoint non-marketable limit orders to be 
routed to an exchange LOB instead of being submitted to qualified auctions. Therefore, this alternative may 
result in a similar portion of individual investor beyond-the-midpoint non-marketable limit orders being 
routed to exchange LOBs as under the Proposal. 

364 
 
 If the threshold were lower, more exchanges and ATSs would be able to meet the 
definition of an open market trading center and be able to operate qualified auctions. More 
exchanges and ATSs might operate qualified auctions, which could enhance competition 
between venues running qualified auctions. This could encourage more innovation in qualified 
auctions. For example, exchange groups may be more likely to run multiple qualified auctions on 
different exchanges with different structures, priority rules, or fees. It would also reduce the 
competitive disadvantage of exchanges and ATSs that would be too small to run qualified 
auctions under the Proposal but would be under this alternative. However, it may result in greater 
fragmentation of liquidity suppliers across different qualified auctions, which may reduce 
competition between liquidity suppliers in individual qualified auctions and reduce price 
improvement to segmented orders submitted to these auctions. Additionally, greater 
fragmentation in qualified auctions could increase the risk that a broker-dealer could route a 
segmented order to a qualified auction with less competition from other liquidity suppliers so 
that the routing broker-dealer may have a greater chance to trade with the segmented order. 
 
 As an alternative, the Commission could limit the definition of an open competition 
trading center to only include national securities exchanges. This alternative could be in 
combination with the 1% average daily share volume in NMS stocks that the Proposal specifies, 
or some other threshold (including no threshold) as discussed in section VII.D.5.a. This would 
mean that NMS Stock ATSs would not be able to operate qualified auctions. 
 Compared to the Proposal, this alternative would put NMS Stock ATSs at a competitive 
disadvantage to exchanges. NMS Stock ATSs that would have met the criteria to be considered 
open competition trading centers under the Proposal would be considered restricted trading 

365 
 
centers under this alternative and would not be able to execute segmented orders, unless it is via 
one of the exceptions.
732
 More segmented orders would be routed to qualified auctions on 
exchanges, which could lead to these exchanges attracting additional order flow and result in a 
greater share of orders being executed on exchanges. This could raise the barriers to entry for 
new NMS Stock ATSs and increase the chance that a smaller NMS Stock ATS exits the market. 
 However, relative to the Proposal, this alternative could result in increased investor 
protection. Because qualified auctions would be limited to being operated by national securities 
exchanges, proposed rule changes to all qualified auctions would be subject to notice, comment 
and Commission approval. This would give the Commission greater ability to review and 
disapprove qualified auctions designs to ensure they met standards of the Proposal, which may 
increase investor protection. 
 
 As an alternative, the Commission could choose to allow NMS Stock ATSs to qualify as 
open competition trading centers and be eligible to run qualified auctions without imposing the 
requirements of proposed Rule 600(b)(64)(ii). However, any average daily NMS stock volume 
threshold that would apply to exchanges for being able to run qualified auctions would also 
apply to NMS Stock ATSs.
733
 This would mean that the NMS Stock ATS would not be required 
to display quotes that are disseminated in consolidated market data, although it would still need 
to subscribe to the ADF so that its qualified auction messages are included in consolidated data. 
                                                
732
  Under the Proposal, NMS stock ATSs operating qualified auctions may have had a competitive advantage 
over exchanges in the sense that they would have more flexibility in making changes to their qualified 
auctions, because their changes would not be subject to notice, comment, and Commission approval, like 
exchanges would. 
733
  Either the proposed 1% average daily volume threshold or a higher or lower threshold (including zero 
percent) as discussed in supra section VII.D.5.a. 

366 
 
Additionally, if the NMS Stock ATS was not subject to the fair access requirements of Rule 
301(b)(5), then it would be allowed to limit subscriber access to its ATS and to its qualified 
auction mechanisms. However, the NMS Stock ATS’s qualified auction would still be limited by 
any of the qualified auction requirements, either proposed Rule 615(c) or one of the alternatives 
discussed in section VII.D.3. 
 This alternative would make it easier for an NMS Stock ATS to operate a qualified 
auction and result in more NMS Stock ATSs operating qualified auctions compared to the 
Proposal. On the one hand, this could enhance competition between venues running qualified 
auctions and encourage more innovation in qualified auctions. However, NMS Stock ATSs 
operating qualified auctions would have a greater competitive advantage over exchanges. 
Compared to exchanges, they could limit access to their platform and the market participants that 
would be eligible to participate in qualified auctions.
734
 Although they would have to charge the 
same fees and rebates to all bidders in the qualified auctions, they would have more flexibility in 
bundling other aspects of their ATS or services to give an advantage to some subscribers over 
others, which may allow these subscribers an indirect advantage in bidding in qualified auctions. 
This may limit competition among liquidity suppliers in these qualified auctions. NMS Stock 
ATSs that operate qualified auctions may also be a more attractive destination for some broker-
dealers to route segmented orders because they may give the broker-dealer routing the order an 
increased chance of being able to trade with the segmented order compared to qualified auctions 
operated by exchanges. These competitive advantages of NMS Stock ATSs operating qualified 
                                                
734
  Additionally, NMS stock ATSs would have more flexibility in making changes to their qualified auctions, 
because their changes would not be subject to notice, comment, and Commission approval, like exchanges 
would. 

367 
 
auctions may limit the incentives for exchanges to operate qualified auctions, which could reduce 
competition between venues running qualified auctions. 
 
 As an alternative, the Commission could establish a new information barrier rule 
specifying new policies and procedures for wholesalers that must be part of the policies and 
procedures for protecting material, non-public information that Exchange Act Section 15(g) 
requires of all broker-dealers. The new rule would require wholesalers to not share information 
on customer order flow, either on individual orders or in aggregate, outside of the wholesaler 
business functions that were responsible for the handling and execution of the customer orders. 
This would prevent wholesalers from sharing this information with other business units and 
affiliates that may engage in proprietary trading or other business functions not related to the 
handling or execution of the customer order. The rule particularly would focus on assuring that 
customer order information is not used in a way that would detract from the interests of 
customers in obtaining best execution of their orders.  
 A wholesaler information barrier rule would result in greater protection of customer order 
information at wholesalers, which would improve investor protection. It may also improve 
customer order execution quality by reducing the chance that another trader will be able to use 
customer order information to trade ahead of or adjust liquidity to disadvantage the customer 
order. This rule may reduce the profits of other wholesaler lines of business or affiliates that may 
have benefited from customer order information. This may reduce the incentives for wholesalers 
to handle individual investor orders, which may reduce the amount of price improvement they 
offer to individual investor orders or the PFOF they pay to retail brokers. To the extent that the 
use of this information by other wholesaler business lines increases information asymmetries and 

368 
 
adverse selection risk for other market participants, the rule may reduce adverse selection risk 
faced by other liquidity providers, which could improve market quality.  
 
 As an alternative the Commission could allow national securities exchanges to display 
the price and size of quotes in their RLP programs on their proprietary feeds and in the 
consolidated market data feed. Under this alternative, exchanges would not execute as large a 
share of marketable individual investor orders as under the Proposal. Instead, the majority of 
marketable individual investor orders would still be internalized by wholesalers. This would 
occur because liquidity providers quoting in exchange RLP programs would not know the 
identity of the retail broker of the marketable individual investor orders they are trading against. 
Therefore, they would usually need to set their quotes in the RLP programs wider to account for 
the risk of trading with individual investor order flow that imposed greater adverse selection risk. 
However, wholesalers would know the identity of the retail broker of the order they were 
handling. This means wholesalers could avoid internalizing individual investor order flow that 
posed greater adverse selection risk and give greater price improvement to individual investor 
orders with less adverse selection risk. 
On average, marketable individual investor orders would receive less price improvement 
under this alternative than the Proposal because wholesalers would not need to compete on an 
order by order basis when they internalize an individual investor order. Institutional investor 
transaction costs would also be higher than under the Proposal because they would not be able to 
trade with marketable individual investor orders as frequently. A lack of order-by-order 
competition would also allow wholesalers to pay more PFOF to retail brokers than under the 
proposal, since wholesalers would be able to internalize order flow at more profitable spreads 
relative to those that would emerge under qualified auctions. From this increased profitability, 

369 
 
wholesalers would be able to pay more PFOF. Increased PFOF revenue would reduce the 
incentive for broker-dealers to generate new revenue lines or expand existing revenue lines. 
Therefore, under this alternative there would not be as significant a change in retail broker 
business models.  
Compared to the baseline, there would be greater transparency in the liquidity available 
to the marketable orders of individual investors. This could increase competition between 
exchange RLPs and wholesalers for the execution of individual investor marketable orders and 
result in more individual investor orders being executed in exchange RLPs (although the 
majority of individual investor orders would still likely be internalized by wholesalers). Because 
broker-dealers would be able to see the displayed quotes in RLPs, when marketable orders of 
individual investors are routed to execute in RLPs, it may be because the quoted prices in the 
RLP were better than the prices the wholesaler would have been willing to internalize the 
individual investor order at. Additionally, the increase in competition may result in wholesalers 
offering more price improvement to the marketable orders of individual investors to attract order 
flow from retail brokers. Both of these effects may result in lower trading costs for marketable 
orders of individual investors compared to the baseline. However, if wholesalers earn lower 
marginal profits from internalizing the orders of individual investors, they may reduce the 
amount of PFOF they pay to retail brokers that accept PFOF, which could indirectly get passed 
through to the retail brokers’ customers in the form of reduced services or an increased risk of 
the retail broker charging commissions. 
 
 As an alternative, in addition to displaying quotes in RLPs, the Commission could 
introduce a new, smaller-sized benchmark from the NBBO for segmented orders. The new 
benchmark would be called the Retail Best Bid and Offer (“RBBO”). It would be constructed 

370 
 
similar to the NBBO, but the threshold for determining when an exchange’s quotes qualified for 
the RBBO would be based on a $500 notional value. It would also incorporate information from 
smaller odd lot quotations and quotes from exchange RLPs, which would be aggregated up 
across multiple price levels by individual exchanges until they exceeded a value of $500 or 
greater. The least aggressive price level from this aggregation would be sent to the SIP for the 
purposes of determining the RBBO. The RBBO would be a protected quote for the purposes of 
executing segmented orders and would also be added as a benchmark in Rule 605 reports for 
calculating price improvements statistics for segmented orders. 
Compared to the Proposal, this alternative would result in wholesalers internalizing a 
larger share of marketable orders of individual investors and fewer such orders being executed 
on exchanges. Although quotes in RLPs and smaller odd-lot quotes would be protected with 
respect to segmented orders, liquidity providers quoting in exchange RLPs would usually need to 
set their quotes in the RLPs wider than the prices at which wholesalers might internalize 
individual investor orders to account for the risk of trading with individual investor order flow 
that imposed greater adverse selection risk.
735
 
On average, marketable orders of individual investors would receive less price 
improvement under this alternative than the Proposal because wholesalers would not need to 
compete on an order by order basis when they internalize an individual investor order. 
Institutional investor trading costs would also be higher than under the Proposal because they 
would not be able to trade with marketable orders of individual investors as frequently. A lack of 
order by order competition would also allow wholesalers to pay more PFOF to retail brokers 
                                                
735
  Wholesalers would still know the identity of the retail broker whose orders they internalize. Compared to 
liquidity suppliers in exchange RLP programs, they would likely be able to further sub-segment individual 
investor order flow when considering how much price improvement to offer. 

371 
 
than under the Proposal. Therefore, there would not be as significant improvements in retail 
broker business models. 
However, compared to the baseline, there would be more price improvement and lower 
trading costs for marketable orders of individual investors. This would occur because 
wholesalers would need to offer price improvement against a tighter benchmark in order to 
internalize a segmented order. The disclosure of price improvement against the NBBO in Rule 
605 reports might also enhance competition among wholesalers to offer greater price 
improvement in order to attract more order flow from retail brokers. 
 
Instead of requiring that segmented orders be routed to qualified auctions, the 
Commission could require that execution quality information concerning an individual investor’s 
order be disclosed on their transaction confirmations. Specifically, under this alternative retail 
brokers would be required to disclose information on the number of shares executed, the price 
improvement relative to the NBBO, the effective-to-quoted spread ratio, and time to execution. 
This information would be provided along with the confirmation of each trade to the customer 
who had placed the order, enhancing transparency on each individual investor’s own execution 
quality. 
The Commission believes that this disclosure would not significantly increase 
transparency regarding how execution quality varies across retail brokers for two reasons. First, 
reflecting their small scale of trading activity, most individual investors rely on a single retail 
broker that executes orders on their behalf. As such, most customers would never have a chance 
to compare the execution quality of their trades via a given retail broker to similar executions at 
another retail broker. Second, even if a customer used services of more than one retail broker 
contemporaneously, the small sample of that individual investor’s execution quality metrics as 

372 
 
well as differences between the orders of the customer that were handled by different retail 
brokers may lead to misleading inferences about execution quality differences across brokers. 
The Commission also believes that the benefits of this alternative are limited relative to 
the Proposal because marketable individual investor orders would remain mostly isolated, i.e., 
mostly executed by the wholesaler handling these orders. A lack of interaction with trading 
interest from other market participants would prevent the execution quality improvements that 
would otherwise obtain under the Proposal. As such, there would be less of an increase in price 
improvement (and reduction in transaction costs) for individual investors compared to the 
Proposal. Additionally, compared to the Proposal, this alternative would not provide other 
market participants, including institutional investors, as great a chance to directly interact with 
order flow from individual investors, which may result in institutional investors receiving worse 
order execution quality compared to the Proposal. 
E. Request for Comments 
The Commission requests comment on all aspects of this initial economic analysis, 
including whether the analysis has: (1) identified all benefits and costs, including all effects on 
efficiency, competition, and capital formation; (2) given due consideration to each benefit and 
cost, including each effect on efficiency, competition, and capital formation; and (3) identified 
and considered reasonable alternatives to the proposed new rules and rule amendments. The 
Commission requests and encourages any interested person to submit comments regarding the 
proposed rules, the Commission’s analysis of the potential effects of the proposed rules and 
proposed amendments, and other matters that may have an effect on the proposed rules. The 
Commission requests that commenters identify sources of data and information as well as 
provide data and information to assist us in analyzing the economic consequences of the 

373 
 
proposed rules and proposed amendments. The Commission also is interested in comments on 
the qualitative benefits and costs identified and any benefits and costs that may have been 
overlooked. In addition to our general request for comments on the economic analysis associated 
with the proposed rules and proposed amendments, the Commission requests specific comment 
on certain aspects of the proposal: 
38. Do commenters believe the Commission has adequately described the market failures due 
to the existing structure of U.S. stock markets? Why or why not?  
39. Do commenters agree with the Commission’s qualitative and quantitative baseline 
descriptions of the structure of trading for NMS stocks, including trading service, broker 
services, and access to market centers? Why or why not? 
40. Do commenters agree with the Commission’s qualitative and quantitative baseline 
descriptions of order routing behavior of retail brokers? Why, or why not? 
41. Do commenters agree with the Commission’s assessment of execution quality and fill 
rates of individual investor orders in NMS stocks? Why, or why not? 
42. Do commenters agree with the Commission’s assessment of brokers’ handling of 
fractional individual investor orders? Why or why not? 
43. Do commenters agree with the Commission’s characterization of individual investor 
order flow segmentation by wholesalers? Why, or why not? 
44. Do commenters agree with the Commission’s characterization of the interaction between 
wholesalers and institutional investors? Please explain why, or why not? 
45. Do commenters agree with the Commission’s description of market making expenses of 
wholesalers? What other types of such market making costs should be considered? Please 
provide conceptual and quantitative context. 

374 
 
46. Do commenters agree with the Commission’s description of the trade-off between PFOF 
and execution quality of individual investor orders faced by PFOF receiving retail 
brokers, driven by the business models of these brokers and the wholesalers who offer 
PFOF? Why, or why not? 
47. Do commenters agree with the Commission’s descriptions of different aspects of retail 
brokers’ business models? Why, or why not? 
48. Do commenters agree the Commission’s assessment of conflict of interests on the parts 
of wholesalers and PFOF receiving brokers? Please explain your reasoning. 
49. Do commenters agree with the Commission’s assessment of the impacts of such conflicts 
of interest on the execution quality of individual investor orders? Why or why not? 
50.  Do commenters agree with the Commission that a lack of order-by-order competition is 
a key missing component in the individual investor order execution process? Please 
explain why or why not.  
51. Do commenters agree with Commission’s assessment that retail brokers’ use of past 
execution quality metrics to determine the allocation of current individual investor order 
flow across wholesalers may lead to poor execution quality for some individual investor 
orders? Why or why not? 
52. Do commenters agree with the Commission that the existing execution practices for 
individual investor orders makes the portion of individual investor order flow with the 
least adverse selection risk inaccessible to other market participants, including 
institutional investors? Please explain why or why not. 
53. Do commenters agree with the Commission’s assessment that the ability of wholesalers 
to choose which orders to internalize and which ones to allow to interact with trading 

375 
 
interest with other market participants places wholesalers at a competitive advantage? 
Why or why not? 
54. Do commenters agree that the proposed Rule would improve competition, including in 
the market for trading service and the market for broker-dealer services? Why or why 
not? 
55. Do you agree with the Commission that the proposed Rule would lower trading costs to 
individual and institutional investors, enhance individual investor order execution quality 
and price discovery, and improve efficiency in the operations of retail brokers? Please 
explain why or why not? 
56.  Does the Economic Analysis in this release account for all compliance costs? If not, 
what other compliance cost would market participants or exchanges incur? Please 
provide estimates of the additional compliance costs that you believe should be 
considered. 
57. Does the Economic Analysis in this release account for all relevant costs? If not, which 
other costs should the economic analysis consider? Please provide estimates of additional 
costs, other than compliance costs, that you believe should be considered. 
58. Do commenters agree with the Commission’s assessment of how the Proposed Rule 
would impact efficiency and capital formation? Why, or why not? Please explain. 
59. Do commenters agree with the Commission’s analysis of the benefits and costs of the 
reasonable alternatives to the Proposed Rule? Why, or why not? Please explain. 
60. Are there any additional reasonable alternatives the Commission should consider? If so, 
please describe that alternative and provide the benefits and costs of that alternative 
relative to the baseline and to the proposed Rule. 

376 
 
61. Should the Commission specify a minimum set of auction standards as part of the 
reasonable alternative to allow open competition trading centers more flexibility in 
designing qualified auctions? If so, what minimum set of auction standards should the 
Commission specify and why? Please explain. What would be the costs and benefits or 
other economic effects of specifying this minimum set of auctions standards? Should the 
Commission specify a minimum auction duration as part of this alternative? Why or why 
not? If so, what minimum auction duration should the Commission specify? Please 
explain and provide as much analysis and discussion as possible. Should the Commission 
specify that execution priority shall not be based on time of receipt of the auction 
response as part of this alternative? Why or why not? Please explain.  
62. Instead of requiring the consolidated tapes to amend their plans to include qualified 
auction messages, should the Commission accelerate the inclusion of all auction 
information in NMS data from the MDI Rules? What would be the costs and benefits or 
other economic effects of accelerating the inclusion of all auction information in NMS 
data? How would such an acceleration impact eventual competition among competing 
consolidators or the realization of the anticipated costs and benefits of the MDI Rules? 
Please explain. 
VIII. Regulatory Flexibility Act Certification 
The Regulatory Flexibility Act (“RFA”)
736
 requires Federal agencies, in promulgating 
rules, to consider the impact of those rules on small entities. Section 603(a) of the Administrative 
Procedure Act,
737
 as amended by the RFA, generally requires the Commission to undertake an 
                                                
736
  5 U.S.C. 601 et seq. 
737
  5 U.S.C. 603(a). 

377 
 
initial regulatory flexibility analysis of the impact of the proposed rule amendments on “small 
entities.”
738
 Section 605(b) of the RFA states that this requirement shall not apply to any 
proposed rule or proposed rule amendment which, if adopted, would not have a significant 
impact on a substantial number of small entities.
739
  
Certification for Proposed Rule 615 and the related amendments.  
Proposed Rule 615 and the proposed related amendments are discussed in detail in 
section IV (Description of Proposed Rule 615) above. The economic impact, including the 
estimated compliance costs and burdens, of Proposed Rule 615 are discussed in section VI 
(Paperwork Reduction Act Analysis) and section VII (Economic Analysis). As discussed above 
in those sections, Proposed Rule 615 and the proposed related amendments would have an 
impact on certain broker-dealers, NMS Stock ATSs, national securities exchanges, and national 
securities associations.  
Impact on Broker-Dealers 
Although section 601(b) of the RFA defines the term “small business,” as stated above, 
the statute permits agencies to formulate their own definitions, and for purposes of Commission 
rulemaking in connection with the RFA, a small business includes a broker or dealer that: (1) had 
total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior 
fiscal year as of which its audited financial statements were prepared pursuant to Rule 17a-5(d) 
under the Exchange Act,
740
 or, if not required to file such statements, a broker-dealer with total 
                                                
738
  Although section 601(b) of the RFA defines the term “small entity,” the statute permits agencies to 
formulate their own definitions. The Commission has adopted definitions for the term “small entity” for the 
purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this 
proposed rulemaking, are set forth in Rule 0-10 under the Exchange Act, 17 CFR 240.0-10. 
739
  5 U.S.C. 605(b). 
740
  17 CFR 240.17a-5(d). 

378 
 
capital (net worth plus subordinated liabilities) of less than $500,000 on the last day of the 
preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not 
affiliated with any person (other than a natural person) that is not a small business or small 
organization.
741
 Applying this test and based on a review of data relating to broker-dealers,
742
 the 
Commission estimates, as discussed below, that of the 3,498 broker-dealers, there are only 4 that 
would be “small entities” and also in the scope of Proposed Rule 615. 
Proposed Rule 615(a) would apply to any restricted competition center that executes 
internally segmented orders in NMS stocks. Restricted competition trading centers would include 
NMS Stock ATSs that do not meet the definition of open competition trading center, and, with 
the exception of national securities exchanges, any other trading center that executes segmented 
orders, which would include certain broker-dealers. The Commission has identified no broker-
dealers that likely execute internally orders for customer accounts that would be “small entities.” 
Proposed Rule 615 and the related amendments would also apply to any broker or dealer 
that could potentially handle segmented orders. As discussed in section VI, this would include 
the 157 broker-dealers that the Commission has identified that carry customer accounts, and 
would be in the scope of Proposed Rule 615. Of these, the Commission has identified 1 that may 
be a “small entity.” Also as discussed in section VI, the Commission has identified 25 broker-
                                                
741
  See 17 CFR 240.0–10(c); see also 17 CFR 240.0-10(i) (providing that a broker or dealer is affiliated with 
another person if: such broker or dealer controls, is controlled by, or is under common control with such 
other person; a person shall be deemed to control another person if that person has the right to vote 25% or 
more of the voting securities of such other person or is entitled to receive 25% or more of the net profits of 
such other person or is otherwise able to direct or cause the direction of the management or policies of such 
other person; or such broker or dealer introduces transactions in securities, other than registered investment 
company securities or interests or participations in insurance company separate accounts, to such other 
person, or introduces accounts of customers or other brokers or dealers, other than accounts that hold only 
registered investment company securities or interests or participations in insurance company separate 
accounts, to such other person that carries accounts on a fully disclosed basis). 
742
  The Commission considered FOCUS data and information about broker-dealers made publicly available by 
FINRA through reports available at https://brokercheck.finra.org/. 

379 
 
dealers that may fall within the scope of Proposed Rule 615 because, although they report that do 
not carry customer accounts, they report that they do effect public customer transactions in 
equity securities on a national securities exchange or OTC and likely are acting as “executing 
brokers.” Of these, the Commission has identified 3 that may potentially be engaged in lines of 
business that would make them within the scope of Proposed Rule 615 and that may also be 
“small entities.” Finally, as discussed in section VI, the Commission has identified 1,267 broker-
dealers that would likely be “originating brokers” with responsibility for monitoring customer 
accounts that could potentially fall within the scope of Proposed Rule 615. Of these, however, 
the Commission concludes that none of the approximately 20 broker-dealers that the 
Commission estimates would fall within the scope of Proposed Rule 615, because they may 
make the certification referred to in paragraph (c)(1) of Proposed Rule 615,
743
 would be “small 
entities.” 
Impact on National Securities Exchanges, National Securities Associations, and NMS Stock 
ATSs 
Also as discussed above in sections IV, VI and VII, Proposed Rule 615 and the proposed 
related amendments would impose requirements on national securities exchanges, national 
securities associations, and NMS Stock ATSs. With respect to national securities exchanges, the 
Commission’s definition of a small entity is an exchange that has been exempt from the 
reporting requirements of Rule 601 of Regulation NMS, and is not affiliated with any person 
                                                
743
  Supra section VI.C.3 (discussing which broker-dealers would likely certify that they established, 
maintained, and enforced policies and procedures reasonably designed to assure that the identity of the 
originating broker will not be disclosed, directly or indirectly, to any person that potentially could 
participate in the qualified auction or otherwise trade with the segmented order). 

380 
 
(other than a natural person) that is not a small business or small organization.
744
 Applying this 
test, no national securities exchange is a small entity. The only national securities association, is 
also not a “small entity.”
745
 
With respect to NMS Stock ATSs, all ATSs, including NMS Stock ATSs, are required to 
register as broker-dealers.
746
 The Commission examined recent FOCUS data for the broker-
dealers that operate the 32 NMS Stock ATSs and applying the test for broker-dealers described 
above
747
 believes that none of the NMS Stock ATSs currently trading were operated by a broker-
dealer that is a “small entity.” 
For the above reasons, the Commission certifies that Proposed Rule 615 and the proposed 
related amendments would not have a significant economic impact on a substantial number of 
small entities for purposes of the RFA.  
The Commission requests written comments regarding this certification. The 
Commission invites commenters to address whether the proposed rules would have a significant 
impact on a substantial number of small entities, and requests that commenters describe the 
                                                
744
  See 17 CFR 240.0-10(e) (providing that when used with reference to an exchange, means any exchange 
that: (1) has been exempted from the reporting requirements of Rule 601; and (2) is not affiliated with any 
person (other than a natural person) that is not a small business or small organization); see also 17 CFR 
240.0-10(i) (providing that a person is affiliated with another person if that person controls, is controlled 
by, or is under common control with such other person; and a person shall be deemed to control another 
person if that person has the right to vote 25% or more of the voting securities of such other person or is 
entitled to receive 25% or more of the net profits of such other person or is otherwise able to direct or cause 
the direction of the management or policies of such other person). 
745
  See 13 CFR 121.201. 
746
  Rule 301(b)(1) of Regulation ATS. Also, while a national securities exchanges can operate an ATS, subject 
to certain conditions, such an ATS would have to be registered as a broker-dealer. See Regulation ATS 
Adopting Release, supra note 27, at 70891. Currently, no national securities exchange operates an ATS that 
trades NMS stocks. 
747
  Supra note 741 and accompanying text. 

381 
 
nature of any impact on small entities and provide empirical data to support the extent of the 
impact. 
IX. Consideration of Impact on the Economy 
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or 
“SBREFA,”
748
 the Commission must advise OMB whether a proposed regulation constitutes a 
“major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results in or is 
likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major 
increase in costs or prices for consumers or individual industries; or (3) significant adverse 
effects on competition, investment, or innovation. The Commission requests comment on the 
potential effect of the proposed amendments on the U.S. economy on an annual basis; any 
potential increase in costs or prices for consumers or individual industries; and any potential 
effect on competition, investment, or innovation. Commenters are requested to provide empirical 
data and other factual support for their views to the extent possible. 
Statutory Authority 
Pursuant to the Exchange Act (15 U.S.C. 78a et seq.), and particularly sections 3(b), 5, 6, 
11A, 15, 15C, 17(a), 17(b), 19, 23(a), and 36 thereof (15 U.S.C. 78c(b), 78e, 78f, 78k-1, 78o, 
78o-5, 78q(a), 78q(b), 78s, 78w(a), and 78mm), the Commission proposes to amend parts 240 
and 242 of chapter II of title 17 of the Code of Federal Regulations as follows:  
List of Subjects  
17 CFR Parts 240 and 242 
 Brokers, Reporting and recordkeeping requirements, Securities. 
Text of the Proposed Rule and Amendments 
                                                
748
  Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a 
note to 5 U.S.C. 601). 

382 
 
For the reasons stated in the preamble, the Commission is proposing to amend title 17, 
chapter II of the Code of Federal Regulations: 
PART 240 – GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE 
ACT of 1934 
 1. The general authority citation for part 240 continues to read as follows: 
 Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 
77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 
78o, 78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 80a-20, 80a-23, 
80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 
5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, 
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. 
 * * * * * 
§ 240.3a51-1 [Amended] 
 2. Amend § 240.3a51-1 by, in paragraph (a), removing the text “§ 242.600(b)(55)” and 
adding in its place “§ 242.600(b)(58)”. 
§ 240.13h-1 [Amended] 
3. Amend § 240.13h-1 by, in paragraph (a)(5), removing the text “§ 242.600(b)(54)” and 
adding in its place “§ 242.600(b)(57)”. 
PART 242–REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES  
4. The authority for part 242 continues to read as follows: 

383 
 
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 
78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-
29, and 80a-37. 
§242.105 [Amended] 
5. Amend § 242.105 by: 
a. In paragraph (b)(1)(i)(C), removing the text “§ 242.600(b)(30)” and adding in its place 
“§ 242.600(b)(33)”. 
b. In paragraph (b)(1)(ii), removing the text “§ 242.600(b)(77)” and adding in its place “§ 
242.600(b)(84)”. 
§ 242.201 [Amended] 
6. Amend § 242.201 by: 
a. In paragraph (a)(1), removing the text “§ 242.600(b)(55)” and adding in its place “§ 
242.600(b)(58)”. 
b. In paragraph (a)(2), removing the text “§ 242.600(b)(30)” and adding in its place “§ 
242.600(b)(33)”. 
c. In paragraph (a)(3), removing the text “§ 242.600(b)(68)” and adding in its place “§ 
242.600(b)(74)”. 
d. In paragraph (a)(4), removing the text “§ 242.600(b)(50)” and adding in its place “§ 
242.600(b)(53)”. 
e. In paragraph (a)(5), removing the text “§ 242.600(b)(58)” and adding in its place “§ 
242.600(b)(62)”. 
f. In paragraph (a)(6), removing the text “§ 242.600(b)(67)” and adding in its place “§ 
242.600(b)(73)”. 

384 
 
g. In paragraph (a)(7), removing the text “§ 242.600(b)(77)” and adding in its place “§ 
242.600(b)(84)”. 
h. In paragraph (a)(9), removing the text “§ 242.600(b)(95)” and adding in its place “§ 
242.600(b)(105)”. 
§ 242.204 [Amended] 
7. Amend § 242.204 by: 
a. In paragraph (g)(2), removing the text Ҥ 242.600(b)(77) (Rule 600(b)(77) of 
Regulation NMS)” and adding in its place “§ 242.600(b)(84) (Rule 600(b)(84) of Regulation 
NMS)”. 
8. Amend § 242.600 by: 
a. In paragraph (b) introductory text, removing the text “(§§ 242.600 through 242.612)” 
and adding in its place “(§§ 242.600 through 242.615)”; 
b. Redesignating paragraphs (b)(3) through (100) as follows: 
Old paragraph New paragraph 
(b)(3) (b)(4) 
(b)(4) (b)(5) 
(b)(5) (b)(6) 
(b)(6) (b)(7) 
(b)(7) (b)(8) 
(b)(8) (b)(9) 
(b)(9) (b)(10) 
(b)(10) (b)(11) 
(b)(11) (b)(12) 
(b)(12) (b)(13) 
(b)(13) (b)(14) 
(b)(14) (b)(15) 

385 
 
(b)(15) (b)(16) 
(b)(16) (b)(17) 
(b)(17) (b)(18) 
(b)(18) (b)(19) 
(b)(19) (b)(20) 
(b)(20) (b)(21) 
(b)(21) (b)(24) 
(b)(22) (b)(25) 
(b)(23) (b)(26) 
(b)(24) (b)(27) 
(b)(25) (b)(28) 
(b)(26) (b)(29) 
(b)(27) (b)(30) 
(b)(28) (b)(31) 
(b)(29) (b)(32) 
(b)(30) (b)(33) 
(b)(31) (b)(34) 
(b)(32) (b)(35) 
(b)(33) (b)(36) 
(b)(34) (b)(37) 
(b)(35) (b)(38) 
(b)(36) (b)(39) 
(b)(37) (b)(40) 
(b)(38) (b)(41) 
(b)(39) (b)(42) 
(b)(40) (b)(43) 
(b)(41) (b)(44) 
(b)(42) (b)(45) 
(b)(43) (b)(46) 
(b)(44) (b)(47) 

386 
 
(b)(45) (b)(48) 
(b)(46) (b)(49) 
(b)(47) (b)(50) 
(b)(48) (b)(51) 
(b)(49) (b)(52) 
(b)(50) (b)(53) 
(b)(51) (b)(54) 
(b)(52) (b)(55) 
(b)(53) (b)(56) 
(b)(54) (b)(57) 
(b)(55) (b)(58) 
(b)(56) (b)(60) 
(b)(57) (b)(61) 
(b)(58) (b)(62) 
(b)(59) (b)(63) 
(b)(60) (b)(65) 
(b)(61) (b)(66) 
(b)(62) (b)(67) 
(b)(63) (b)(68) 
(b)(64) (b)(70) 
(b)(65) (b)(71) 
(b)(66) (b)(72) 
(b)(67) (b)(73) 
(b)(68) (b)(74) 
(b)(69) (b)(75) 
(b)(70) (b)(76) 
(b)(71) (b)(77) 
(b)(72) (b)(78) 
(b)(73) (b)(79) 
(b)(74) (b)(80) 

387 
 
(b)(75) (b)(82) 
(b)(76) (b)(83) 
(b)(77) (b)(84) 
(b)(78) (b)(85) 
(b)(79) (b)(86) 
(b)(80) (b)(88) 
(b)(81) (b)(89) 
(b)(82) (b)(90) 
(b)(83) (b)(92) 
(b)(84) (b)(93) 
(b)(85) (b)(94) 
(b)(86) (b)(95) 
(b)(87) (b)(96) 
(b)(88) (b)(97) 
(b)(89) (b)(98) 
(b)(90) (b)(99) 
(b)(91) (b)(101) 
(b)(92) (b)(102) 
(b)(93) (b)(103) 
(b)(94) (b)(104) 
(b)(95) (b)(105) 
(b)(96) (b)(106) 
(b)(97) (b)(107) 
(b)(98) (b)(108) 
(b)(99) (b)(109) 
(b)(100) (b)(110) 
 
c. Adding new paragraphs (b)(3), (b)(22), (b)(23), (b)(59), (b)(64), (b)(69), (b)(81), 
(b)(87), (b)(91), and (b)(100). 

388 
 
The additions read as follows: 
§ 242.600 NMS security designation and definitions. 
 * * * * * 
 (b) * * *  
 (3) Affiliate means, with respect to a specified person, any person that, directly or 
indirectly, controls, is under common control with, or is controlled by, the specified person. 
 * * * * * 
 (22) Continuous order book means a system that allows orders for NMS stocks to be 
accepted and executed on a continuous basis. 
 (23) Control means the power, directly or indirectly, to direct the management or policies 
of a broker, dealer, or open competition trading center, whether through ownership of securities, 
by contract, or otherwise. A person is presumed to control a broker, dealer, or open competition 
trading center if that person:  
 (i) Is a director, general partner, or officer exercising executive responsibility (or having 
similar status or performing similar functions);  
 (ii) Directly or indirectly has the right to vote 25 percent or more of a class of voting 
securities or has the power to sell or direct the sale of 25 percent or more of a class of voting 
securities of the broker, dealer, or open competition trading center; or  
 (iii) In the case of a partnership, has contributed, or has the right to receive upon 
dissolution, 25 percent or more of the capital of the broker, dealer, or open competition trading 
center. 
 * * * * * 
 (59) NMS Stock ATS has the meaning provided in § 242.300(k). 

389 
 
 * * * * * 
 (64) Open competition trading center means either: 
(i) A national securities exchange that: 
(A) Operates an SRO trading facility that is an automated trading center and displays 
automated quotations that are disseminated in consolidated market data pursuant to § 242.603(b); 
(B) Provides transaction reports identifying the national securities exchange as the venue 
of execution that are disseminated in consolidated market data pursuant to § 242.603(b); 
(C) During at least four of the preceding 6 calendar months, had an average daily share 
volume of 1.0 percent or more of the aggregate average daily share volume for NMS stocks as 
reported by an effective transaction reporting plan; and 
(D) Operates pursuant to its own rules providing that the national securities exchange will 
comply with the requirements of § 242.615(c) for a qualified auction; or 
(ii) An NMS Stock ATS that: 
(A) Displays quotations through an SRO display-only facility in compliance with § 
242.610(b); 
(B) Operates as an automated trading center and displays automated quotations that are 
disseminated in consolidated market data pursuant to § 242.603(b); 
(C) Provides transaction reports identifying the NMS Stock ATS as the venue of 
execution that are disseminated in consolidated market data pursuant to § 242.603(b); 
(D) Permits any registered broker or dealer to become a subscriber of the NMS Stock 
ATS; provided, however, the NMS Stock ATS: 
(1) Shall not permit any registered broker or dealer subject to a statutory disqualification 
to be or become a subscriber; and 

390 
 
(2) May, pursuant to written policies and procedures, prohibit any registered broker or 
dealer from being or becoming a subscriber, or impose conditions upon such a subscriber, that 
does not meet the standards of financial responsibility or operational capability as are prescribed 
by such written policies and procedures; 
(E) Provides equal access among all subscribers of the NMS Stock ATS and the 
registered broker-dealer of the NMS Stock ATS to all services that are related to: 
(1) A qualified auction operated by the NMS Stock ATS under § 242.615(c); and 
(2) Any continuous order book operated by the NMS Stock ATS; 
(F) During at least four of the preceding six calendar months, had an average daily share 
volume of 1.0 percent or more of the aggregate average daily share volume for NMS stocks as 
reported by an effective transaction reporting plan; and 
(G) Operates pursuant to an effective Form ATS-N under § 242.304, and such Form 
ATS-N evidences compliance by the NMS Stock ATS with the requirements of § 242.615(c) for 
a qualified auction and with the provisions of paragraphs (b)(64)(ii)(A) through (b)(64)(ii)(F) of 
this section. 
 * * * * * 
 (69) Originating broker means any broker with responsibility for handling a customer 
account, including, but not limited to, opening and monitoring the customer account and 
accepting and transmitting orders for the customer account. 
 * * * * * 
 (81) Qualified auction means an auction that is operated by an open competition trading 
center pursuant to § 242.615(c). 
 * * * * * 

391 
 
 (87) Restricted competition trading center means any trading center that is not an open 
competition trading center and is not a national securities exchange. 
 * * * * *  
 (91) Segmented order means an order for an NMS stock that is for an account: 
(i) Of a natural person or an account held in legal form on behalf of a natural person or 
group of related family members; and 
(ii) In which the average daily number of trades executed in NMS stocks was less than 40 
in each of the six preceding calendar months. 
(iii) For purposes of this paragraph (b)(91), group of related family members means a 
group of natural persons with any of the following relationships: child, stepchild, grandchild, 
great grandchild, parent, stepparent, grandparent, great grandparent, domestic partner, spouse, 
sibling, stepbrother, stepsister, niece, nephew, aunt, uncle, mother-in-law, father-in-law, son-in-
law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive and foster 
relationships; and any other natural person (other than a tenant or employee) sharing a household 
with any of the foregoing natural persons. 
* * * * * 
(100) Subscriber has the meaning provided in § 242.300(b). 
* * * * *  
§ 242.602 [Amended] 
9. Amend § 242.602 by, in paragraphs (a)(5)(i) and (ii), removing the text “§ 
242.600(b)(90)” and adding in its place “§ 242.600(b)(99)”. 
§ 242.611 [Amended] 

392 
 
10. Amend § 242.611 by, in paragraph (c), removing the text “§ 242.600(b)(38)” and 
adding in its place “§ 242.600(b)(41)”. 
§ 242.614 [Amended] 
11. Amend § 242.614 by, in paragraphs (d)(1), (2), and (3), removing the text “§ 
242.600(b)(20)” and adding in its place “§ 242.600(b)(21)”. 
12. Add § 242.615 to read as follows: 
§ 242.615 Order competition rule. 
(a) Order competition requirement. A restricted competition trading center shall not 
execute internally a segmented order for an NMS stock until after a broker or dealer has exposed 
such order to competition at a specified limit price in a qualified auction that meets the 
requirements of paragraph (c) of this section and is operated by an open competition trading 
center. If the segmented order is not executed in the qualified auction, a restricted competition 
trading center may, as soon as reasonably possible, execute the segmented order internally at a 
price that is equal to or more favorable for the segmented order than the specified limit price in 
the qualified auction. 
(b) Exceptions. The order competition requirement of paragraph (a) of this section shall 
not apply if: 
(1) The segmented order is received and executed by the restricted competition trading 
center during a time period when no open competition trading center is operating a qualified 
auction for the segmented order; 
(2) The market value of the segmented order is at least $200,000 calculated with 
reference to the midpoint of the national best bid and national best offer when the segmented 
order is received by the restricted competition trading center; 

393 
 
(3) The segmented order is executed by the restricted competition trading center at a price 
that is equal to or more favorable for the segmented order than the midpoint of the national best 
bid and national best offer when the segmented order is received by the restricted competition 
trading center; 
(4) The segmented order is a limit order with a limit price selected by the customer that is 
equal to or more favorable for the segmented order than the midpoint of the national best bid and 
national best offer when the segmented order is received by the restricted competition trading 
center; or 
(5) The segmented order is received and executed by the restricted competition trading 
center during a time period when no open competition trading center is operating a qualified 
auction for the segmented order that accepts orders that are not entirely in whole shares, and the 
customer selected a size for a segmented order that is not entirely in whole shares of an NMS 
stock, in which case any portion of such segmented order that is less than one whole share of the 
NMS stock, and only such portion, shall not be subject to the order competition requirement of 
paragraph (a) of this section. 
(c) Qualified auction requirements. An open competition trading center shall comply 
with the following requirements for operation of a qualified auction for segmented orders. 
(1) Auction message. (i) An auction message announcing the initiation of a qualified 
auction for a segmented order shall be provided for dissemination in consolidated market data 
pursuant to § 242.603(b). Each such auction message shall invite priced auction responses to 
trade with a segmented order and shall include the identity of the open competition trading center 
and the symbol, side, size, limit price, and identity of the originating broker for the segmented 
order. 

394 
 
(ii) If more than one broker is an originating broker for a segmented order, the originating 
broker identified pursuant to paragraph (c)(1)(i) of this section shall be the broker responsible for 
approving the opening of accounts with customers. 
(iii) Notwithstanding the provisions of paragraph (c)(1)(i) of this section, the identity of 
the originating broker shall not be disclosed in the auction message if such originating broker 
certifies that it has established, maintained, and enforced written policies and procedures 
reasonably designed to assure that the identity of the originating broker will not be disclosed, 
directly or indirectly, to any person that potentially could participate in the qualified auction or 
otherwise trade with the segmented order, and the originating broker’s certification is 
communicated to the open competition trading center conducting the qualified auction. 
(2) Auction responses. An open competition trading center shall accept auction responses 
for a period of at least 100 milliseconds after an auction message is provided for dissemination in 
consolidated market data and shall end the auction not more than 300 milliseconds after an 
auction message is provided for dissemination in consolidated market data. Auction responses 
shall remain undisplayed during the auction period and not disseminated at any time thereafter. 
(3) Pricing increments. Segmented orders and auction responses shall be priced in an 
increment of no less than $0.001 for segmented orders and auction responses with prices of 
$1.00 or more per share, in an increment of no less than $0.0001 for segmented orders and 
auction responses with prices of less than $1.00 per share, or at the midpoint of the national best 
bid and national best offer. 
(4) Fees and rebates. No fee shall be charged for submission or execution of a segmented 
order. No fee shall be charged for submission of an auction response. The fee for execution of an 
auction response shall not exceed $0.0005 per share for auction responses priced at $1.00 per 

395 
 
share or more, shall not exceed 0.05% of the auction response price per share for auction 
responses priced at less than $1.00 per share, and otherwise shall be the same rate for executed 
auction responses in all auctions. Any rebate for the submission or execution of a segmented 
order or for the submission or execution of an auction response shall not exceed $0.0005 per 
share for segmented orders or auction responses priced at $1.00 per share or more, shall not 
exceed 0.05% of the segmented order or auction response price per share for segmented orders or 
auction responses priced at less than $1.00 per share, and otherwise shall be the same rate for 
segmented orders in all auctions and shall be the same rate for auction responses in all auctions. 
(5) Execution priority of auction responses and resting orders. (i) The highest priced 
auction responses to buy and the lowest priced auction responses to sell shall have priority of 
execution. 
(ii) Auction responses for the account of a customer shall have priority over auction 
responses for the account of a broker or dealer at the same price. 
(iii) As long as an auction response is received within the prescribed time period, 
execution priority shall not be based on time of receipt of the auction response. 
(iv) The terms of execution priority shall not favor the broker or dealer that routed the 
segmented order to the auction, the originating broker for the segmented order, the open 
competition trading center operating the auction, or any affiliate of the foregoing persons. 
(v) Orders resting on a continuous order book of the open competition trading center 
operating the qualified auction at the conclusion of an auction period shall have priority over 
auction responses at a less favorable price for the segmented order. Displayed orders resting on a 
continuous order book of the open competition trading center operating the qualified auction 
shall have priority over auction responses at the same price. Auction responses shall have 

396 
 
priority over undisplayed orders resting on a continuous order book of the open competition 
trading center operating the qualified auction at the same price. 
(d) Open competition trading centers. (1) A national securities exchange or NMS Stock 
ATS shall not operate a qualified auction for segmented orders unless it complies with the 
provisions of this section and meets the definition of open competition trading center in § 
242.600(b)(64). 
(2) An open competition trading center shall not operate a system, other than a qualified 
auction, that is limited, in whole or in part, to the execution of segmented orders unless any 
segmented order executed through such system:  
(i) Is received and executed by the open competition trading center during a time period 
when no open competition trading center is operating a qualified auction for the segmented 
order; 
(ii) Has a market value of at least $200,000 calculated with reference to the midpoint of 
the national best bid and national best offer when the segmented order is received by the open 
competition trading center; or 
(iii) Is executed by the open competition trading center at a price that is equal to or more 
favorable for the segmented order than the midpoint of the national best bid and national best 
offer when the segmented order is received by the open competition trading center. 
(iv) Is a limit order with a limit price selected by the customer that is equal to or more 
favorable for the segmented order than the midpoint of the national best bid and national best 
offer when the segmented order is received by the open competition trading center; or 
(v) Is received and executed by the open competition trading center during a time period 
when no open competition trading center is operating a qualified auction for the segmented order 

397 
 
that accepts orders that are not entirely in whole shares, and is a size, selected by the customer, 
that is not entirely in whole shares of an NMS stock, in which case any portion of such 
segmented order that is less than one whole share of the NMS stock, and only such portion, may 
be executed through such system. 
(e) Originating brokers. (1) An originating broker shall establish, maintain, and enforce 
written policies and procedures reasonably designed to identify the orders of customers as 
segmented orders as defined in § 242.600(b)(91).  
(2) An originating broker shall not route a customer order identified as a segmented order 
without also identifying such order as a segmented order to the routing destination. 
(3) An originating broker that makes a certification referred to in paragraph (c)(1)(iii) of 
this section shall establish, maintain, and enforce written policies and procedures reasonably 
designed to assure that the identity of the originating broker will not be disclosed, directly or 
indirectly, to any person that potentially could participate in the qualified auction or otherwise 
trade with the segmented order. 
(4) Where there are multiple originating brokers for a segmented order, an originating 
broker shall not be deemed to be in violation of the provisions of paragraphs (e)(1) through (3) of 
this section arising solely from a failure to meet a responsibility that was specifically allocated 
by prior written agreement to another originating broker. 
(f) Brokers or dealers. (1) No broker or dealer that receives an order identified as a 
segmented order shall route such order without identifying such order as a segmented order to 
the routing destination. 
(2) No broker or dealer with knowledge of where a segmented order is to be routed for 
execution shall submit an order, or enable an order to be submitted by any other person, to the 

398 
 
continuous order book of an open competition trading center or of a national securities exchange 
that could have priority to trade with the segmented order at such open competition trading 
center or national securities exchange. 
(g) National securities exchanges. A national securities exchange shall not operate a 
system, other than a qualified auction, that is limited, in whole or in part, to the execution of 
segmented orders unless any segmented order executed through such system: 
(1) Is received and executed by the national securities exchange during a time period 
when no open competition trading center is operating a qualified auction for the segmented 
order; 
(2) Has a market value of at least $200,000 calculated with reference to the midpoint of 
the national best bid and national best offer when the segmented order is received by the national 
securities exchange; 
(3) Is executed by the national securities exchange at a price that is equal to or more 
favorable for the segmented order than the midpoint of the national best bid and national best 
offer when the segmented order is received by the national securities exchange.  
(4) Is a limit order with a limit price selected by the customer that is equal to or more 
favorable for the segmented order than the midpoint of the national best bid and national best 
offer when the segmented order is received by the national securities exchange; or 
(5) Is received and executed by the national securities exchange during a time period 
when no open competition trading center is operating a qualified auction for the segmented order 
that accepts orders that are not entirely in whole shares, and is a size, selected by the customer, 
that is not entirely in whole shares of an NMS stock, in which case any portion of such 

399 
 
segmented order that is less than one whole share of the NMS stock, and only such portion, may 
be executed through such system. 
§ 242.1000 [Amended] 
13. Amend § 242.1000, in the definition Plan processor, by removing the text “§ 
242.600(b)(67)” and adding in its place “§ 242.600(b)(73)”. 
By the Commission. 
Dated: December 14, 2022. 
 
 
J. Matthew DeLesDernier, 
Deputy Secretary. 

Conformed to Federal Register Version 

SECURITIES AND EXCHANGE COMMISSION 

17 CFR Parts 240 and 242  

[Release No. 34-96495; File No. S7-31-22] 

RIN 3235-AM57 

Order Competition Rule 

AGENCY: Securities and Exchange Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing to amend 

the regulation governing the national market system (“NMS”) under the Securities Exchange Act 

of 1934 (“Exchange Act”) to add a new rule designed to promote competition as a means to 

protect the interests of individual investors and to further the objectives of an NMS. The 

proposed rule would prohibit a restricted competition trading center from internally executing 

certain orders of individual investors at a price unless the orders are first exposed to competition 

at that price in a qualified auction operated by an open competition trading center. The proposed 

rule would also include limited exceptions to this general prohibition. In addition, the 

Commission is proposing to amend the regulation governing the NMS to add new defined terms 

included in the proposed rule.  

DATES: Comments should be received on or before March 31, 2023. 

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

Electronic Comments: 

• Use the Commission’s internet comment form 

(https://www.sec.gov/rules/submitcomments.htm); or  

https://www.sec.gov/rules/submitcomments.htm


2 

 

• Send an email to [email protected]. Please include File Number S7-31-22 on the 

subject line. 

Paper Comments: 

• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street 

NE, Washington, DC 20549-1090.  

All submissions should refer to File Number S7-31-22. This file number should be 

included on the subject line if email is used. To help the Commission process and review your 

comments more efficiently, please use only one method. The Commission will post all 

comments on the Commission’s 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, on official business days between the hours of 10 a.m. 

and 3 p.m. Operating conditions may limit access to the Commission’s Public Reference Room. 

All comments received will be posted without change. Persons submitting comments are 

cautioned that the Commission does not redact or edit personal identifying information from 

comment submissions. You should submit only information that you wish to make available 

publicly.  

Studies, memoranda, or other substantive items may be added by the Commission or staff 

to the comment file during this rulemaking. A notification of the inclusion in the comment file of 

any materials will be made available on the Commission’s website. To ensure direct electronic 

receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to 

receive notifications by email. 

FOR FURTHER INFORMATION CONTACT: Dan Gray, Senior Special Counsel, Jennifer 

Dodd, Special Counsel, or Stacia Sowerby, Special Counsel, at (202) 551-5500, Office of Market 

mailto:[email protected]
http://www.sec.gov/rules/proposed.shtml
http://www.sec.gov/


3 

 

Supervision, Division of Trading and Markets, Securities and Exchange Commission, 100 F 

Street NE, Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment 

amendments to Regulation NMS [17 CFR 242.600 through 242.614] (“Regulation NMS”) that 

would add new 17 CFR 242.615 (“Proposed Rule 615”), add new defined terms to 17 CFR 

242.600 (“Rule 600”) that are used in Proposed Rule 615, and make conforming amendments to 

defined terms in 17 CFR 242.602, 17 CFR 242.611, and 17 CFR 242.614; and conforming 

amendments to defined terms in 17 CFR 240.3a51-1, 17 CFR 240.13h-1, 17 CFR 242.105, 17 

CFR 242.201, 17 CFR 242.204, and 17 CFR 242.1000. 

TABLE OF CONTENTS 

I. Introduction .......................................................................................................................5 

II. Overview of Market Structure for NMS Stocks ............................................................. 13 

A. Investors ........................................................................................................................ 13 

B. Trading Centers ............................................................................................................. 15 

C. Order Types and Trading Costs ..................................................................................... 19 

D. Quantitative Measures of Order Execution Quality and Trading Costs .......................... 25 
1. Description of Quantitative Measures ........................................................................ 26 
2. Examples of Calculating Measures of Order Execution Quality and Trading Costs .... 29 

III. Statutory and Regulatory Background....................................................................... 33 

A. Statutory Framework for an NMS .................................................................................. 33 

B. Current Regulatory Components of the NMS for NMS Stocks ........................................ 38 
1. Rules Addressing Consolidated Market Data ............................................................. 40 
2. Rules Addressing Order Handling and Execution....................................................... 54 

3. Rules Addressing Access to Trading Centers ............................................................. 61 
4. Disclosure of Order Routing Practices and Order Execution Statistics........................ 67 

IV. Description of Proposed Rule 615 ............................................................................... 69 

A. Overview of Order Competition Requirement ................................................................ 69 

B. Coverage of Proposed Rule 615 ..................................................................................... 77 
1. Definition of Segmented Order .................................................................................. 77 
2. Definition of Open Competition Trading Center ........................................................ 84 

3. Definition of Restricted Competition Trading Center ................................................. 98 
4. Definition of Originating Broker ................................................................................ 99 

5. Exceptions ............................................................................................................... 101 



4 

 

C. Qualified Auction Requirements .................................................................................. 106 
1. Auction Messages .................................................................................................... 106 

2. Auction Responses .................................................................................................. 111 
3. Pricing Increment .................................................................................................... 112 

4. Fees and Rebates ..................................................................................................... 114 
5. Auction Execution Priority ...................................................................................... 117 

D. Open Competition Trading Center Requirements ......................................................... 122 

E. Originating Broker Requirements ................................................................................ 123 

F. Broker-Dealer Requirements ....................................................................................... 126 

G. National Securities Exchange Requirements ................................................................ 129 

V. Request for Comment.................................................................................................... 131 
VI. Paperwork Reduction Act Analysis .......................................................................... 141 

A. Summary of Collection of Information ......................................................................... 142 
1. Auction Messages .................................................................................................... 142 

2. Identifying and Marking Segmented Orders ............................................................. 143 
3. Originating Broker Certification .............................................................................. 143 

4. NMS Stock ATS Policies and Procedures to Exclude Subscribers ............................ 144 

B. Proposed Use of Information ....................................................................................... 145 
1. Auction Messages .................................................................................................... 145 

2. Identifying and Marking Segmented Orders ............................................................. 146 
3. Originating Broker Certification .............................................................................. 146 

4. NMS Stock ATS Policies and Procedures to Exclude Subscribers ............................ 147 

C. Respondents ................................................................................................................ 148 
1. Auction Messages .................................................................................................... 150 

2. Identifying and Marking Segmented Orders ............................................................. 152 
3. Originating Broker Certification .............................................................................. 155 

4. NMS Stock ATS Policies and Procedures to Exclude Subscribers ............................ 157 

D. Burdens ....................................................................................................................... 157 
1. Auction Messages .................................................................................................... 157 

2. Identifying and Marking Segmented Orders ............................................................. 161 
3. Originating Broker Certification .............................................................................. 170 

4. NMS Stock ATS Policies and Procedures for Excluding Subscribers ....................... 173 

E. Collection of Information is Mandatory ....................................................................... 176 

F. Confidentiality of Information Collected ...................................................................... 176 
1. Auction Messages .................................................................................................... 177 

2. Identifying and Marking Segmented Orders ............................................................. 177 
3. Originating Broker Certification .............................................................................. 177 

4. NMS Stock ATS Policies and Procedures to Exclude Subscribers ............................ 178 

G. Retention Period for Recordkeeping Requirements ...................................................... 178 

H. Request for Comments ................................................................................................. 178 

VII. Economic Analysis ..................................................................................................... 179 

A. Introduction ................................................................................................................. 179 



5 

 

B. Baseline ....................................................................................................................... 186 
1. Competition for Liquidity Provision in NMS Stocks ................................................ 189 

2. Segmentation of Individual Investor Order Flow ...................................................... 195 
3. Institutional Investor Interactions with Retail Orders ............................................... 209 

4. Execution Quality of Individual Investor Marketable Orders in NMS Stocks ........... 210 
5. Variation in Wholesaler Execution Quality .............................................................. 231 

6. Retail Broker Services ............................................................................................. 243 
7. Rules Addressing Consolidated Market Data ........................................................... 248 

C. Economic Effects ......................................................................................................... 253 
1. Benefits ................................................................................................................... 256 
2. Costs........................................................................................................................ 280 

3. Competition ............................................................................................................. 313 
4. Efficiency ................................................................................................................ 328 

5. Capital Formation .................................................................................................... 331 

D. Reasonable Alternatives .............................................................................................. 331 
1. Variation in Provisions regarding Segmentation and Routing ................................... 332 

2. Alternate Definitions of Segmented Orders .............................................................. 343 
3. Variation in Auction Design .................................................................................... 348 

4. Variation in Exceptions to the Order Competition Requirement ............................... 359 
5. Variation in the Definition of Open Competition Trading Centers ............................ 363 

6. Wholesaler Information Barriers .............................................................................. 367 
7. Display Quotes in Retail Liquidity Programs ........................................................... 368 

8. Creation of a Retail Best Bid and Offer .................................................................... 369 
9. Disclosure of Execution Quality of Individual Investor Orders ................................ 371 

E. Request for Comments ................................................................................................. 372 

VIII. Regulatory Flexibility Act Certification ............................................................... 376 
IX. Consideration of Impact on the Economy ................................................................ 381 

Statutory Authority ............................................................................................................... 381 

 

I. Introduction 

The Commission is proposing a new rule, Proposed Rule 615 of Regulation NMS, 

entitled the “Order Competition Rule,” to promote a more competitive, transparent, and efficient 

market structure for NMS stocks, with resulting benefits to investors. Proposed Rule 615 would 

require that certain orders of individual investors be exposed to competition in fair and open 

auctions, before such orders could be executed internally by trading centers that restrict order-by-



6 

 

order competition.1 The Commission believes that the proposal would better advance each of the 

five Congressional objectives for an NMS set forth in section 11A of the Exchange Act.2 In 

particular, Proposed Rule 615 is designed to benefit individual investors by promoting 

competition and transparency as means to enhance the opportunity for their orders to receive 

more favorable prices than they receive in the current market structure, as well as to benefit 

investors generally by giving them an opportunity to interact directly with a large volume of 

individual investor orders that are mostly inaccessible to them in the current market structure. 

This section provides an overview of that market structure and how that market structure may 

impact investors. 

As discussed in sections II and VII below, individual investors primarily use market 

orders and marketable limit orders (collectively known as “marketable orders”) to trade in NMS 

stocks. Market participants who use these orders seek to trade immediately at the best available 

prices in the market. Broker-dealers route more than 90% of marketable orders of individual 

investors in NMS stocks to a small group of six off-exchange dealers, often referred to as 

“wholesalers.”3 The wholesaling business is highly concentrated, with two firms capturing 

                                                
1  “Order-by-order” competition in this context means an opportunity to compete to trade with individual 

investor orders by offering the most favorable price for each order based on the particular characteristics of 

the order, including the nature of the NMS stock, the size of the order, and market conditions at the time the 

order is submitted. Section II below provides an overview of the current market structure for NMS stocks, 

including descriptions of key terms used in this release that readers may find useful to assess and comment 

on the Commission’s proposal. Among many others, these terms include “individual investors,” “trading 

centers,” and “wholesalers.” 

2  15 U.S.C. 78k-1 (“section 11A”). These objectives are: (1) economically efficient execution of securities 

transactions; (2) fair competition among brokers and dealers, among exchange markets, and between 
exchange markets and markets other than exchange markets; (3) the availability to brokers, dealers, and 

investors of information with respect to quotations for and transactions in securities; (4) the practicability of 

brokers executing investors’ orders in the best market; and (5) an opportunity, consistent with objectives 1 

and 4, for investors’ orders to be executed without the participation of a dealer. 15 U.S.C. 78k-1(a)(1)(C). 

3  Table 3, infra, section VII.B.2.a. 



7 

 

approximately 66% of the executed share volume of wholesalers as of the first quarter of 2022.4 

The practice of separately identifying and routing the marketable orders of individual investors 

to wholesalers is a form of “segmentation.” The term “segmentation” can refer to any practice by 

which a certain category of orders is identified and treated differently for execution than other 

categories of orders. 

As discussed in the economic analysis in section VII.B.2 below, individual investor 

orders are segmented because they are “low-cost” flow — they impose lower adverse selection 

costs on liquidity providers than the unsegmented order flow routed to national securities 

exchanges. “Adverse selection” involves situations where buyers and sellers have different 

information, and specifically for a liquidity provider, refers to the extent to which prices move 

against it after a trade. For example, if the price of a stock drops right after a liquidity provider 

buys it, the liquidity provider has suffered from adverse selection. Generally, the more severe the 

adverse selection, the larger the “effective spread” that would be expected for a trade because 

liquidity providers require a wider effective spread to compensate them for the higher cost of 

adverse selection.5 In this respect, the size of effective spreads can be interpreted as a measure of 

the average adverse selection that liquidity providers expect to suffer when trading with 

incoming orders. Data analysis conducted for this proposal reveals that the average adverse 

                                                
4  See infra note 372. 

5  As explained in more detail in section II.D below, the “effective spread” of a trade is measured as double 

the difference between the trade’s execution price and the midpoint of the national best bid and offer at the 

time of order receipt. Adverse selection reflects the “price impact” of a trade, which is measured as the 

difference between the midpoint of the national best bid and offer at the time of the trade and the midpoint 

of the national best bid and offer at a specified time (e.g., one minute or five minutes) after the time of the 

trade. 



8 

 

selection costs of orders routed to wholesalers are far lower than the average adverse selection 

costs of orders routed to national securities exchanges.6  

The primary benefit of segmentation for individual investors is that it can provide an 

opportunity for their low-cost orders to be executed at better prices than those generally available 

on national securities exchanges, a practice known as “price improvement.”7 As discussed in 

section VII below, wholesalers often provide some price improvement relative to the best 

publicly quoted prices for round lot sizes on national securities exchanges.8 

Price improvement, however, is not the same as competitive order execution. Today, the 

primary business model of wholesalers is to trade bilaterally as principal with individual investor 

orders (a form of “internalization”). Typically, the way broker-dealers choose a wholesaler for 

any particular order is not based on the price the wholesaler is willing to provide for that order, 

as wholesalers do not display or otherwise indicate in real-time the prices at which they are 

willing to trade with individual investor orders. Instead, a wholesaler is often chosen by a 

formula that depends on past execution quality of the wholesaler, its relationship with the broker-

dealer, and other factors. In addition, the bilateral nature of the wholesaler business model not 

only restricts contemporaneous competition among wholesalers, it also restricts opportunities for 

other market participants to trade with the low-cost flow. Once a wholesaler receives an 

                                                
6  Table 7, infra, section VII.B.4 (adverse selection costs, as measured by price impact, of marketable orders 

of individual investors in all NMS stocks are 71% lower at wholesalers (1.26 basis points) than on 

exchanges (4.40 basis points)). 

7  Section VII.B.4 below discusses an analysis of wholesaler trading data indicating the relationship between 

segmentation, adverse selection costs, and order execution quality. 

8  Table 5, infra, section VII.B.4 (83.17% of marketable orders routed to wholesalers receive price 

improvement when compared to the best publicly quoted prices for round lot sizes on national securities 

exchanges, and 8.78% of marketable orders routed to national securities exchanges receive such price 

improvement). These better prices are due in large part to the ability of wholesalers to offer sub-penny 
prices that are not permitted on national securities exchanges and other trading centers. The current rules 

that govern sub-penny trading are discussed in section III.B.2.c below. 



9 

 

individual investor’s marketable order, the wholesaler’s execution of the order does not face 

competition at all — the wholesaler typically executes the order internally without providing any 

opportunity for other market participants, including institutional investors, to compete to provide 

more favorable prices for the order.9 This lack of order-by-order competition among market 

participants is particularly significant in the market for NMS stocks, which is an order-driven 

market in which a wide range of market participants, including institutional investors, seek to 

provide liquidity on national securities exchanges by posting orders for the approximately 12,000 

NMS stocks. In contrast, the listed options market is a quote-driven market in which professional 

market makers dominate liquidity provision by displaying quotes in the more than 1,000,000 

different options series. In sum, in the current market structure for NMS stocks, individual 

investor orders are not merely segmented; they also are isolated from order-by-order competition 

by a wide range of market participants, which, as discussed below, can affect the prices that 

individual investors receive for their orders. 

Data analysis suggests that opening up individual investor orders to order-by-order 

competition would lead to significantly better prices for those investors. In a fully competitive 

market, competition among liquidity providers would be expected to drive the amount of price 

improvement that an order receives to a level commensurate with its adverse selection cost 

(setting aside other relevant costs). All else equal, the lower an order’s expected adverse 

selection cost, the greater would be the order’s expected price improvement. However, as 

discussed in section VII.C.1.b below, the current isolation of individual investor orders from 

order-by-order competition results in suboptimal price improvement for such orders. The 

                                                
9  As shown in Table 7, infra, section VII.B.4, wholesalers execute internally (in “principal transactions”) 

90.44% of the dollar volume of executed marketable orders routed to them. As discussed in section 

VII.B.2.b below, wholesalers primarily obtain external executions of the remaining volume of the 

marketable orders in “riskless principal” transactions. 



10 

 

Commission labels this forgone price improvement “competitive shortfall.” Based on an analysis 

of trading data from the wholesalers and national securities exchanges in the first quarter of 

2022, the competitive shortfall is estimated to be approximately 1.08 basis points per dollar 

traded by wholesalers or 1.08 cents for every $100 traded, with an estimated total annual 

competitive shortfall of $1.5 billion.10 

In addition to this competitive shortfall, the isolation of individual investor orders at 

wholesalers prevents other investors from having an opportunity to trade with this low-cost flow. 

Institutional investors that currently submit their own marketable orders on national securities 

exchanges and other trading centers potentially could trade at better prices if given an 

opportunity to interact with the marketable orders of individual investors in fair and open 

auctions.11 For example, data analysis indicates that undisplayed liquidity often is available at 

trading centers other than wholesalers when a wholesaler executes marketable orders of 

individual investors at prices less favorable for the individual investor than the prices of the 

undisplayed liquidity.12 Moreover, if institutional investors that currently pay a full “spread” 

(that is, the difference between the highest price bid and the lowest price offer) to access 

liquidity were able instead to interact in auctions with the marketable orders of individual 

investors that currently are mostly inaccessible to them, these institutional investors could benefit 

from lower spread costs.13 

                                                
10  Table 18 and Table 19, infra, section VII.C.1.b (figures in text are for the CAT rebate base competitive 

shortfall estimates). 

11  See, e.g., section VII.B.3, infra, discussing institutional investor interactions with retail orders. 

12  Table 20, infra, section VII.C.1.b. 

13  See, e.g., Section VII.C.1.c, infra, discussing potential improved execution quality for institutional investor 

orders. 



11 

 

The Commission is proposing Rule 615 to encourage greater competition for individual 

investor order execution. Proposed Rule 615 generally would require that individual investor 

orders be exposed to order-by-order competition in fair and open auctions designed to obtain the 

best prices before such orders could be internalized by wholesalers or any other type of trading 

center that restricts order-by-order competition. As a result, individual investor orders could 

continue to receive the benefits of segmentation (i.e., better prices that reflect the low adverse 

selection costs of those orders), but without the negative effects of those orders being isolated 

from order-by-order competition (i.e., such better prices not fully reflecting the low adverse 

selection costs of those orders; and a substantial percentage of those orders seldom being 

accessible to institutional investors and other market participants). In sum, the auctions required 

by Proposed Rule 615 are intended to enhance competitive forces as a means to protect the 

interests of investors in the NMS. 

In developing the specific elements of Proposed Rule 615, the Commission has been 

guided by this goal of benefiting investors by enhancing competition. The overriding objective of 

these elements of Proposed Rule 615 is to maximize the opportunity for a wide range of market 

participants to participate in auctions on terms that will promote the best possible prices for the 

orders of individual investors. In this respect, the Commission has drawn from its experience 

with the operation of existing auctions for orders in listed options and tailored Proposed Rule 

615 to promote fair and open auctions that reflect the particular nature of the market for NMS 

stocks. As discussed in section IV below, these elements would include the wide dissemination 

of auction messages in consolidated market data, requirements that any fees and rebates be 

capped at a low level ($0.0005 per share for auction prices of $1 or more) and be flat across all 

market participants, and requirements for execution priority of auction responses that give no 



12 

 

advantage to the broker-dealer that routed the marketable order of an individual investor to the 

auction.  

In addition, the Commission has limited the scope of Proposed Rule 615 to contexts in 

which an auction could be most beneficial for individual investors. For example, individual 

investors that trade many times per day tend to use marketable orders that pose higher adverse 

selection risk for liquidity providers; hence, their orders would be outside the scope of the rule.14 

In addition, proposed exceptions are provided for orders with a market value of $200,000 or 

more and for orders with execution prices (including prices constrained by non-marketable limit 

prices) that are very favorable for individual investors (i.e., the midpoint of the best displayed 

round lot quotations or better).15 These exceptions would not be mandatory, however, which 

means that broker-dealers could choose whether or not to route orders with these characteristics 

to an auction. 

As discussed in section VII.D, the Commission assessed several alternatives to Proposed 

Rule 615, both to the design of the required auctions and to the auction approach itself. The 

Commission preliminarily considers Proposed Rule 615 to be the best approach for investors. As 

described throughout this release, and in more detail in section IV, Proposed Rule 615 is 

designed to maintain the price improvement benefits of the segmentation of individual investor 

orders and to enhance those benefits through the introduction of order-by-order competition with 

a wide range of market participants, including institutional investors, through an auction 

mechanism that is fast, low-cost, transparent, and fair.  

                                                
14  See infra section IV.B.1; section VII.D.2.c. 

15  As discussed in section IV.B.1 below, a subset of non-marketable limit orders with prices not as favorable 

for individual investors (i.e., beyond the midpoint of the best displayed round lot quotations) would not 

qualify for the proposed exceptions. 



13 

 

The next two sections of this release are intended to provide background information on 

the current structure and regulation of the market for NMS stocks that will help promote 

understanding of the details of the Commission’s proposal. Section II provides a general 

overview of the current market structure for NMS stocks, and section III provides background on 

the statutory and regulatory framework for NMS stocks. Section IV then describes the proposal 

in detail, and section V consolidates all Commission requests for comment on the proposal. 

II. Overview of Market Structure for NMS Stocks 

This section provides an overview of the market structure for NMS stocks,16 particularly 

focusing on the types of market participants, order types, and trading costs that will be referred to 

throughout this release.17 An understanding of the current market structure, particularly the 

trading costs of different types of market participants, including liquidity takers and liquidity 

providers, is critically important when assessing the rationale and objectives of Proposed Rule 

615. 

A. Investors 

Section 11A(a)(2) of the Exchange Act18 provides that the Commission should have due 

regard for the protection of “investors” when facilitating the establishment of an NMS. As used 

                                                
16  NMS stocks generally include equity securities other than options that are listed on a national securities 

exchange. Rule 600(b)(55) of Regulation NMS defines “NMS stock” as any NMS security other than an 

option, and Rule 600(b)(54) defines “NMS security” to mean any security or class of securities for which 
transaction reports are collected, processed, and made available pursuant to an effective transaction 

reporting plan, or an effective NMS plan for reporting transactions in listed options. The definition of NMS 

stock does not include securities that are not listed on a national securities exchange, sometimes referred to 

as “over-the-counter” or “OTC” securities.  

17  A much more extensive discussion of the “market microstructure” of securities markets is provided by 

treatises on the subject. See, e.g., Larry Harris, Trading and Exchanges: Market Microstructure for 

Practitioners (Oxford University Press 2003) (“Harris Treatise”); Joel Hasbrouck, Empirical Market 

Microstructure: The Institutions, Economics, and Econometrics of Securities Trading (Oxford University 

Press 2007) (“Hasbrouck Treatise”). 

18  15 U.S.C. 78k-1(a)(2). 



14 

 

in this release, the term “individual investor” will refer to natural persons that trade relatively 

infrequently for their own or closely related accounts.19 Individual investors generally trade in 

relatively small sizes that can be executed against immediately available liquidity. 

The term “institutional investor” as used in this release refers to investors that trade in 

much larger sizes and much more frequently than individual investors. Many institutional 

investors, such as pension funds and mutual funds, operate on behalf of a large number of 

individuals. Because institutional investors need to trade in large sizes that can exceed 

immediately available liquidity, their large “parent” orders typically will be broken into smaller 

“child” orders. Institutional investors typically are focused primarily on obtaining the best price 

for their large parent orders as a whole.20 The child orders will be fed into the market gradually 

so as to minimize the extent to which market prices move away before the full size of a parent 

order is executed, which is known as “slippage.” One means for institutional investors to 

minimize slippage is to limit “information leakage” concerning the unexecuted portions of their 

large parent orders by closely controlling the impact of the execution of their child orders on 

market prices.  

                                                
19  For a discussion of the specific orders covered by Proposed Rule 615, see Proposed Rule 600(b)(91) 

(defining the term “segmented order”) and section IV.B.1 below (discussing the proposed definition of 

“segmented order”). As discussed in section IV.B, the Commission is proposing to add definitions to Rule 

600(b) of Regulation NMS and adjust the numbering of current definitions accordingly. Throughout this 

release, unless otherwise noted, references to existing Rule 600(b) definitions are to the definitions as they 

are currently numbered. References to proposed new definitions are designated with “Proposed Rule 

600(b)” and reflect the proposed adjusted numbering. 

20  See, e.g., Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594, 3604-3605 (Jan. 21, 

2010) (“Equity Market Structure Concept Release”) (measuring the transaction costs of institutional 
investors “can be extremely complex” because their “large orders often are broken up into smaller child 

orders and executed in a series of transactions” and “[m]etrics that apply to small order executions may 

miss how well or poorly the large order traded overall.”). 



15 

 

B. Trading Centers 

Trades in NMS stocks are executed at a number of different types of trading centers.21 As 

discussed below, trading centers that currently trade NMS stocks can be divided into five 

categories: (1) national securities exchanges operating SRO trading facilities;22 (2) alternative 

trading systems (“ATSs”) that trade NMS stocks (“NMS Stock ATSs”); (3) exchange market 

makers; (4) wholesalers; and (5) any other broker-dealer that executes orders internally by 

trading as principal or crossing orders as agent.23 

National securities exchanges, among other things, operate SRO trading facilities that 

bring together purchasers and sellers of NMS stocks and execute their trades, fall within the 

definition of an exchange in section 3(a)(1) of the Exchange Act,24 and are required to register 

under section 6 of the Exchange Act.25 As discussed further in section III.A below, national 

securities exchanges are subject to a comprehensive regulatory regime that, among other things, 

requires that their rules not impose any burden on competition not necessary or appropriate in 

furtherance of the purposes of the Exchange Act and not be designed to permit unfair 

discrimination between customers, issuers, and broker-dealers. All national securities exchanges 

                                                
21  Rule 600(b)(95) of Regulation NMS defines “trading center” as a national securities exchange or national 

securities association that operates a self-regulatory organization (“SRO”) trading facility, an alternative 

trading system, an exchange market maker, an OTC market maker, or any other broker or dealer that 

executes orders internally by trading as principal or crossing orders as agent.  

22  Rule 600(b)(89) of Regulation NMS defines “SRO trading facility” as, among other things, a facility 

operated by a national securities exchange that executes orders in a security. 

23  “Broker” is generally defined in section 3(a)(4)(A) of the Exchange Act as any person engaged in the 

business of effecting transactions in securities for the account of others. 15 U.S.C. 78c(a)(4)(A). “Dealer,” 

in turn, is generally defined in section 3(a)(5)(A) of the Exchange Act as any person engaged in the 
business of buying and selling securities for such person’s own account through a broker or otherwise. 15 

U.S.C. 78c(a)(5)(A). The term “broker-dealer” is used in this release to encompass all brokers, all dealers, 

and firms that are both brokers and dealers. 

24  Section 3(a)(1) of the Exchange Act defines “exchange” as, among other things, any organization that 

provides facilities for bringing together purchasers and sellers of securities. 15 U.S.C. 78c(1). 

25  15 U.S.C. 78f. 



16 

 

publicly display quotations for NMS stocks in consolidated market data and are known as “lit” 

trading centers. As discussed in section III.B.1 below, the best-priced quotations of round lots of 

national securities exchanges (highest priced bids to buy and lowest priced offers to sell) are 

included in the consolidated market data feeds currently disseminated by centralized securities 

information processors (“SIPs”). In the first quarter of 2022, 16 national securities exchanges 

executed 59.7% of share volume in NMS stocks.26 

NMS Stock ATSs operate facilities that fall within the definition of an exchange in 

section 3(a)(1) of the Exchange Act, but, as discussed in section III.B.3.b below, they are 

exempted from that definition if they register as broker-dealers and otherwise comply with 

Regulation ATS under the Exchange Act.27 No NMS Stock ATS currently displays quotations in 

NMS stocks in consolidated market data. The trading centers that do not display quotations are 

known as “dark” trading centers or “dark pools.” An NMS Stock ATS is required to provide fair 

access to its services if it had 5% or more of the average daily volume with respect to an NMS 

stock during four of the preceding six calendar months,28 and as of November 30, 2022, one 

NMS Stock ATS discloses on its Form ATS-N that it is subject to these fair access requirements 

                                                
26  Table 1, infra, section VII.B.1. 

27  17 CFR 240.3a1-1(a)(2); see also Securities Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 

70844, 70858 (Dec. 22, 1998) (“Regulation ATS Adopting Release”) (stating that the Commission would 

not consider making an assessment whether a particular system should register as an exchange unless such 

system exceeded the volume thresholds specified in 17 CFR 240.3a1-1(b): during three of preceding four 

calendar quarters, the system had (1) 50% or more of the average daily dollar trading volume in any 

security and 5% or more of the average daily dollar trading volume in any class of security; or (2) 40% or 

more of the average daily dollar trading volume in any class of securities). 

28  See Rule 301(b)(5); infra section III.B.3.b (discussing fair access requirements for NMS Stock ATSs).  



17 

 

for securities that are available for trading on its platform.29 In the first quarter of 2022, 32 ATSs 

executed 10.2% of volume in NMS stocks.30 

An exchange market maker is defined in Rule 600(b)(32) of Regulation NMS as any 

member of a national securities exchange that is registered as a specialist or market maker 

pursuant to the rules of such exchange. Exchange rules typically require exchange market makers 

to provide liquidity by displaying quotations at which they are willing to buy and sell NMS 

stocks for their own account.31 In this respect, exchange market makers fall within the definition 

of a “dealer” in section 3(a)(5) of the Exchange Act as buying and selling NMS stocks for their 

own accounts as part of a regular business. The on-exchange volume of exchange market makers 

in NMS stocks is included in the volume for national securities exchanges referenced above 

because it is reported by such exchanges. 

Wholesalers fall within the definition of an OTC market maker in Rule 600(b)(64) of 

Regulation NMS — any dealer that holds itself out as being willing to buy from and sell to its 

customers, or others, in the United States, an NMS stock for its own account on a regular or 

continuous basis otherwise than on a national securities exchange in amounts of less than block 

                                                
29  See Dealerweb Inc., Form ATS-N/OFA, Part III, Items 11 (Trading Services, Facilities and Rules) and Item 

25 (Fair Access) (filed Oct. 24, 2022), 

https://www.sec.gov/Archives/edgar/data/817462/000081746222000015/0000817462-22-000015-

index.htm (disclosing that the NMS Stock ATS is subject to the fair access requirements in symbols SPY 

and QQQ). This NMS Stock ATS generally limits its eligible subscribers to market makers, banks, broker-

dealers, and asset managers with at least $10 under management. See id. at Part III, Item 1 (Types of 

Subscribers) and Item 2 (Eligibility for ATS Services). Access to Form ATS-Ns filed by NMS Stock ATSs 

are available on the Commission’s website at https://www.sec.gov/divisions/marketreg/form-ats-n-

filings.htm. 

30  Table 1, infra, section VII.B.1.  

31  See, e.g., New York Stock Exchange LLC (“NYSE”) Rule 104 (Dealing and Responsibilities of DMMs) 

(requiring the exchange’s Designated Market Makers (“DMMs”) to maintain a continuous two-sided quote 

for securities in which the DMM unit is registered with the exchange) available at 

https://nyseguide.srorules.com/rules. 

https://www.sec.gov/Archives/edgar/data/817462/000081746222000015/0000817462-22-000015-index.htm
https://www.sec.gov/Archives/edgar/data/817462/000081746222000015/0000817462-22-000015-index.htm
https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm
https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm
https://nyseguide.srorules.com/rules


18 

 

size. The term “wholesaler” is not defined in Regulation NMS, but commonly refers to an OTC 

market maker that seeks to attract orders from broker-dealers that service the accounts of 

individual investors,32 referred to in this release as “retail brokers.”33 The public order-routing 

reports required by 17 CFR 242.606 (“Rule 606”)34 show that the six largest wholesalers 

collectively paid retail brokers $235 million in payment for order flow (“PFOF”) in the first 

quarter of 2022 for orders in NMS stocks.35 Many retail brokers do not accept PFOF for 

marketable orders in NMS stocks routed to wholesalers, though the retail brokers that do accept 

PFOF represent 73.88% of the dollar volume of marketable orders of retail brokers routed to 

wholesalers.36 

Wholesalers do not display or otherwise reveal the prices at which they are willing to 

execute individual investor orders internally. Moreover, as discussed in section III.B.3 below, 

while they are subject to Commission and SRO requirements as broker-dealers, wholesalers are 

not subject to a statutory or regulatory requirement to provide fair access. They are not required 

to provide an opportunity for other market participants, including institutional investors and 

other exchange market makers, to compete on an order-by-order basis to provide the best prices 

for the individual investor orders that the wholesalers internalize. Some institutional investors, 

                                                
32  Another type of business operated by some OTC market makers is known as a “single dealer platform,” 

which primarily seeks to attract the orders of institutional investors for internal execution. Infra section 

VII.B.3. 

33  As discussed in section VII.B.1.a below, the Commission has identified six firms as wholesalers based on 

the public order routing disclosures of retail brokers. Retail broker services are discussed in section VII.B.6 

below. 

34  Rule 606 is discussed in section III.B.4 below. 

35  See infra section VII.B.6.a. 

36  See Table 14, infra section VII.B.5.c. 



19 

 

for example, consider this order flow to be “inaccessible.”37 In the first quarter of 2022, six large 

wholesalers internally executed 23.9% of share volume in NMS stocks.38 

The fifth and final category of trading center that executes trades in NMS stocks is a 

catchall category encompassing broker-dealers that execute orders internally by trading as 

principal or crossing orders as agent. In the first quarter of 2022, over 230 broker-dealers (other 

than NMS Stock ATSs and OTC market makers) reported trades in NMS stocks, which 

accounted for the remaining 6.3% of share volume in NMS stocks.39 

C. Order Types and Trading Costs 

When seeking to buy and sell NMS stocks, investors submit orders through the broker-

dealers that service their accounts. The order type most frequently used to trade by individual 

investors is a “market” order, which simply instructs a broker-dealer to seek an execution of the 

order at the best available price in the market. In contrast to market orders, a “limit order” 

specifies a “limit price” — a price beyond which the investor is not willing to trade. Limit prices 

reflect an intention to “buy low and sell high.” For example, a buy order with a limit price of $20 

means the investor would like to buy as soon as possible, but only at a price that is $20 or less. 

Conversely, a sell order with a limit price of $20 means the investor would like to sell as soon as 

possible, but only at a price that is $20 or more. 

                                                
37  See, e.g., Cowen, Inc., “Cowen Market Structure: Retail Trading — What’s going on, what may change, 

and what can you do about it?” (Mar. 23, 2021), available at https://www.cowen.com/insights/retail-

trading-whats-going-on-what-may-change-and-what-can-institutional-traders-do-about-it/ (“Market makers 

print most of these shares internally at their firm, so they trade off-exchange. One way we have for 

isolating retail volume is to look at the share of volume that trades off-exchange, but not in a dark pool. We 

refer to this as ‘inaccessible liquidity.’ This is because most institutional orders – whether they are executed 

via algos directly or by high touch desks – primarily go to exchanges and dark pools.”). 

38  Table 1, infra, section VII.B.1. 

39  Table 1, infra, section VII.B.1. 

https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-what-can-institutional-traders-do-about-it/
https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-what-can-institutional-traders-do-about-it/


20 

 

In practice, the likelihood and speed of execution of limit orders can vary greatly 

depending primarily on the relation between their limit prices and the best-priced quotations that 

are displayed by national securities exchanges in the consolidated market data feeds. As 

discussed in section III.B.1 below, these quotations are in “round lot” sizes, which currently are 

100 shares or more for nearly all NMS stocks. The highest price bid for an NMS stock is known 

as the national best bid (“NBB”), and the lowest price offer for an NMS stock is known as the 

national best offer (“NBO”). Collectively, the NBB and NBO are known as the national best bid 

and offer (“NBBO”). When a limit order to buy has a limit price that is equal to or greater than 

the NBO, it is known as a “marketable” limit order because it can be executed immediately at the 

best displayed quote to sell. Similarly, a limit order to sell is marketable when it has a limit price 

that is equal to or less than the NBB.40 

For example, assume the NBB is $20.00 and the NBO is $20.10. A buy limit order with a 

price of $20.10 or higher is marketable, and a sell limit order with $20.00 or lower is marketable. 

Marketable limit orders are similar to market orders with respect to their willingness to trade 

immediately at the best displayed prices or better and will be referred to collectively in this 

release as “marketable orders.” 

Investors that use marketable orders to trade immediately at the best available prices are 

known as “liquidity takers” and generally incur a trading cost for the service, known as a 

“spread.” In the example above, when the NBBO is $20.00 and $20.10, the quoted spread is 10 

cents. An investor that wished to avoid paying a spread could use a “non-marketable” limit order 

in an attempt to become a “liquidity provider.” A non-marketable limit order to buy has a limit 

                                                
40  Rule 600(b)(47) of Regulation NMS defines a “marketable limit order” as any buy order with a 

limit price equal to or greater than the NBO at the time of order receipt, or any sell order with a 

limit price equal to or less than the NBB at the time of order receipt. 

https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=9c12da86854e96c46dc95ff993598e0a&term_occur=999&term_src=Title:17:Chapter:II:Part:242:Subjgrp:6:242.600
https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=aca6a2edfd32ecdd4517cde9436e8e17&term_occur=999&term_src=Title:17:Chapter:II:Part:242:Subjgrp:6:242.600
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https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=9c12da86854e96c46dc95ff993598e0a&term_occur=999&term_src=Title:17:Chapter:II:Part:242:Subjgrp:6:242.600
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price that is less than the NBO, and a non-marketable limit order to sell has a limit price that is 

greater than the NBB.41 For example, again using the example when the NBBO is $20.00 and 

$20.10, an investor could submit a buy limit order with a limit price of $20.00. This buy order is 

not marketable because it is priced less than the NBO of $20.10 and therefore cannot be executed 

immediately against the best displayed offer. A non-marketable limit order generally will “rest” 

on the continuous order book of a trading center awaiting the arrival of a contra-side marketable 

order against which it can execute. In the example, if the resting non-marketable limit order to 

buy were able to obtain an execution at its limit price of $20.00 (e.g., by interacting with a 

contra-side marketable order to sell), the investor would have succeeded in trading at a price that 

was 10 cents lower than if the investor had used a marketable order and traded at the NBO of 

$20.10. The risk, however, of using a non-marketable limit order is that it may not execute at all 

if market prices move away from the order (i.e., prices increase for buy orders and decrease for 

sell orders). If this happens, the investor will incur an opportunity cost by missing a trade. 

Using the example of an NBBO of $20.00 and $20.10, assume the investor submitted a 

non-marketable order to buy with a limit price of $20.00, but did not obtain an execution and the 

NBBO then rose to $20.15 and $20.25. Seeing that the market was moving away, the investor 

decided to cancel the unexecuted non-marketable order and replace it with a marketable order to 

buy, which then was executed at the new NBO price of $20.25. In this case, the investor incurred 

an opportunity cost of 15 cents — the difference between (1) the original NBO price of $20.10 

that the investor likely could have obtained if the investor first had used a marketable order to 

                                                
41  Rule 600(b)(57) of Regulation NMS defines “non-marketable limit order” as any limit order other than a 

marketable limit order. 

https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=9c12da86854e96c46dc95ff993598e0a&term_occur=999&term_src=Title:17:Chapter:II:Part:242:Subjgrp:6:242.600
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22 

 

buy at $20.10 rather than using the non-marketable order in an unsuccessful attempt to buy at 

$20.00, and (2) the price of $20.25 at which the investor actually obtained an execution. 

In sum, an investor’s decision of whether to use marketable orders or non-marketable 

orders to trade can depend on an often complex judgment of whether prices are likely to move in 

the short-term future. Individual investors, who typically do not follow market prices closely 

throughout a trading day, often will not feel in the best position to make this judgment and 

generally choose to be liquidity takers by using marketable orders to obtain the certainty of an 

immediate execution at a displayed price or better.42 Accordingly, a key source of trading costs 

for individual investors are the spreads they pay when using marketable orders. The narrower the 

spreads, the lower the prices at which they will buy and the higher the prices at which they will 

sell, which translate into lower trading costs and higher investment returns. Conversely, wider 

spreads mean higher trading costs and lower investment returns. 

The spread costs of individual investors highlight the role played by liquidity providers in 

determining spreads. Liquidity providers determine spreads by setting the prices at which they 

are willing to trade with marketable orders as such orders are submitted by liquidity takers. 

Liquidity providers can include professional market intermediaries, such as exchange market 

makers and OTC market makers (including wholesalers), as well as investors that use non-

marketable limit orders. For example, national securities exchanges, which display the quotations 

that determine the NBBO, all operate continuous order books. Unexecuted non-marketable 

                                                
42  Rule 606 order-routing reports reveal that customers of retail brokers used marketable orders for 

approximately 39-40% of their trades and used “other” orders for approximately 26-27% of their trades. 

Table 3, infra, section VII.B.2.a. As presented in Table 2 in section VII.B.2.a below, however, the PFOF 

rates received from wholesalers for these “other” orders almost exactly matched the rates received from 

wholesalers for marketable limit orders. Accordingly, it is likely that most of these other orders were 

marketable (i.e., immediately executable at the best available prices), although the orders may have had 

particular characteristics that led them to be classified as other orders. 



23 

 

orders that have been routed to an exchange rest on its continuous order book awaiting an 

opportunity for interaction with incoming contra-side orders. Using the NBBO example of 

$20.00 and $20.10, assume a national securities exchange has displayed limit orders resting on 

its continuous order book with limit prices that equal the NBBO, but then an institutional 

investor submits a buy order with a limit price of $20.02 for display on the continuous order 

book. At this point, there will be a new NBB of $20.02 and the NBBO spread will have been 

reduced from 10 cents to 8 cents. If an individual investor’s market order to sell was routed to 

the exchange, the order would execute at the new NBB of $20.02, saving the individual investor 

two cents per share compared to the old NBB of $20.00. 

For liquidity providers, the adverse selection costs of trading with a given marketable 

order flow are a key factor for determining the prices at which they are willing to trade with such 

flow, particularly for professional market intermediaries. These market intermediaries generally 

seek to generate short-term trading profits by buying and selling on a continuous basis and 

capturing a spread between their buys and sells. Adverse selection costs reflect the extent to 

which prices move against the liquidity provider in the seconds and minutes after a trade, which 

increases the difficulty faced by the liquidity provider in successfully capturing a spread between 

buys and sells. 

For example, assume an NBBO of $20.00 and $20.10, and a market maker provides 

liquidity by trading with a contra-side marketable sell order at the $20.00 NBB. The market 

maker may hope to profit by quickly providing liquidity to a contra-side marketable buy order at 

the $20.10 NBO and thereby earning a 10 cent spread. Seconds later, however, and before the 

market maker is able to liquidate the buy position, the NBBO declines to $19.85 and $19.95. In 

this case, the market maker has bought immediately prior to a 15 cent decline in the NBBO. This 



24 

 

subsequent move in the NBBO is known as “price impact.” Instead of earning a 10 cent spread 

as it hoped by providing liquidity when the NBBO was $20.00 and $20.10, the market maker 

would realize a loss of 5 cents on its position if it then provided liquidity to a contra-side 

marketable buy order by selling at the new NBO of $19.95. Therefore, the market maker had an 

adverse selection cost of 15 cents. Accordingly, market makers assess the potential adverse 

selection costs of the liquidity-taking order flow with which they are likely to interact when 

setting the spreads at which they are willing to provide liquidity to such flow. Segmentation of 

marketable orders with low adverse selection costs is a means for liquidity providers to control 

such costs. As discussed in section VII,43 the marketable orders of individual investors routed to 

wholesalers have adverse selection costs (as measured by price impact) that are approximately 

71% lower than the adverse selection costs of orders routed to national securities exchanges. The 

low adverse selection costs of the segmented marketable orders of individual investors generally 

enable wholesalers to offer better prices for such orders than would be available for unsegmented 

orders routed to national securities exchanges. 

The trading examples thus far have assumed that trades occur at the NBBO prices, which 

are determined by round lot quotations displayed on national securities exchanges. In fact, 

however, trades can be executed on national securities exchanges at prices that are better than 

NBBO prices (“NBBO price improvement”). Marketable orders routed to access the NBBO at a 

national securities exchange can obtain NBBO price improvement in two primary contexts. First, 

a national securities exchange may have displayed orders on its continuous order book with sizes 

less than round lots, known as “odd lot quotations,” that are priced better than the NBBO. If a 

contra-side marketable order is routed to a national securities exchange with such an odd lot 

                                                
43  See Table 7, infra, section VII.B.4. 



25 

 

quotation, the contra-side marketable order will interact with the odd-lot quotation and receive a 

better price than the NBBO. Second, there may be undisplayed non-marketable limit orders 

resting on the continuous order book of a national securities exchange with prices that are better 

than such exchange’s displayed quotations. One common example is an NBBO midpoint order. 

An NBBO midpoint order has an execution price that is pegged to, and accordingly fluctuates 

with, the midpoint of the NBBO. If the NBBO is $20.00 and $20.10, and an NBBO midpoint 

order to sell is resting on the continuous order book of a national securities exchange, a 

marketable order to buy that is routed to such exchange will execute at the NBBO midpoint price 

of $20.05 rather than the NBO of $20.10. By trading at the NBBO midpoint, the incoming 

marketable buy order has obtained an immediate execution without paying any spread, and the 

resting NBBO midpoint order to sell has not earned any spread. Institutional investors may use 

undisplayed NBBO midpoint orders because they provide an opportunity to trade with contra-

sided marketable flow, but without the information leakage (and potential slippage) that could 

occur if their orders were displayed. 

D. Quantitative Measures of Order Execution Quality and Trading Costs 

A variety of quantitative measures can be used to assess the quality of order executions 

that broker-dealers obtain for their individual investor customers, as well as more generally the 

trading costs of liquidity takers and liquidity providers. 17 CFR 242.605 (“Rule 605”) of 

Regulation NMS,44 for example, requires many trading centers, including national securities 

exchanges and wholesalers, to make data files publicly available on a monthly basis that include 

detailed measures of execution quality for marketable and non-marketable orders in NMS stocks. 

This section will describe some of the quantitative measures included in Rule 605 data, as well 

                                                
44  Rule 605 is discussed in section III.B.4 below. 



26 

 

as provide concrete examples illustrating specifically how the measures are calculated. These 

quantitative measures are referenced extensively throughout this release to explain the rationale 

for and the potential economic effects of Proposed Rule 615. 

 

The following is a list, with brief descriptions, of quantitative measures of order 

execution quality and trading costs in NMS stocks that are included in, or can be derived from, 

Rule 605 data files. Specific examples of how the measures are calculated will be provided in 

section II.D.2 below. 

As stated above, NBBO price improvement is the amount by which the execution price of 

a marketable order is better than the relevant NBBO quotation at the time a marketable order is 

received by a trading center.45 For marketable buy orders, it is the amount by which the buy 

order received a price lower than the NBO at the time of order receipt. For marketable sell 

orders, it is the amount by which the sell order received a price higher than the NBB at the time 

of order receipt. 

“NBBO quoted half-spread” is one-half of the difference between the NBO and NBB, as 

measured at the time when a marketable order is received by a trading center. The full quoted 

spread is halved to reflect the spread cost for establishing or liquidating a position (long or 

short). For example, if an investor uses a marketable order to buy at the NBO (incurring a half-

spread to establish a long position), but then is able to use a non-marketable order to sell at the 

NBO (earning a half-spread to liquidate the long position), the investor would have paid a net 

spread of 0 cents on the “round-trip” transaction.  

                                                
45  Rule 600(b)(36) of Regulation NMS defines “executed with price improvement” as, for buy orders, 

execution at a price lower than the NBO at the time of order receipt and, for sell orders, execution at a price 

higher than the NBB at the time of order receipt. 



27 

 

“Effective half-spread” is the half-spread actually paid by a marketable order. It is 

calculated by comparing execution prices with the NBBO midpoint, rather than the relevant 

NBB or NBO, at the time of order receipt.46 Accordingly, a trading center’s average effective 

half-spread for marketable orders may be narrower or wider than the NBBO quoted half-spread, 

depending on the extent to which execution prices at a trading center are inside, at, or outside 

NBBO prices. 

“Price impact” is the extent to which the NBBO midpoint moves against the liquidity 

provider for a marketable order in a short time period after the order execution. For Rule 605 

reporting, the time period is five minutes after the time of order execution. For the analyses of 

CAT data provided in section VII.B.4 below, the time period is one minute after the time of 

order execution.47 Price impact measures the extent of adverse selection costs faced by a 

liquidity provider and is closely related to realized half-spread (described next). When price 

impact and realized half-spread are calculated using the same post-trade time period, the 

difference between the effective half-spread and the realized half-spread on a trade will equal the 

price impact of the trade.48 

                                                
46  Rule 600(b)(8) of Regulation NMS defines “average effective spread” as the share-weighted average of 

effective spreads for order executions calculated, for buy orders, as double the amount of difference 

between the execution price and the midpoint of the NBB and NBO at the time of order receipt and, for sell 

orders, as double the amount of difference between the midpoint of the NBB and NBO at the time of order 

receipt and the execution price. 

47  The analysis in section VII.B.4 below uses one minute to reflect the increase in trading speed in the years 

since Rule 605 was adopted. 

48  See, e.g., Hasbrouck Treatise at 147 (“The execution cost based on the pretrade bid-ask midpoint (BAM) is 

also known as the effective cost. Since 2001, the U.S. SEC has required U.S. equity markets to compute 
effective costs and make summary statistics available on the Web. . . . The rule . . . also requires 

computation of the realized cost. . . . The difference between effective and realized costs is sometimes used 

as an estimate of the price impact of the trade. The realized cost can also be interpreted as the revenue of 

the dealer who sold to the customer . . . and then covered his position at the subsequent BAM.”).  



28 

 

“Realized half-spread” is calculated similarly to the effective half-spread, but, instead of 

using the NBBO midpoint at the time of order receipt, the realized spread calculation uses the 

NBBO midpoint a short time period after the execution of a marketable order.49 For Rule 605 

reporting, the time period is five minutes after the time of order execution. For the analyses of 

CAT data provided in section VII.B.4 below, the time period is one minute after the time of 

order execution.50 When deciding to include realized spread statistics in Rule 605 reports, the 

Commission stated that the smaller the average realized spread, “the more market prices have 

moved adversely to the market center’s liquidity providers after the order was executed,” which 

shrinks the spread “realized” by the liquidity providers.51 The Commission further stated that the 

average realized spread statistic for market and marketable limit orders potentially could help “to 

spur more vigorous competition to provide the best prices to these orders to the benefit of many 

retail investors.”52 In sum, by capturing the extent of adverse selection costs faced by liquidity 

providers, realized spreads are designed to provide a more accurate measure of the potential 

profitability of trading for liquidity providers than do effective spreads.53 

                                                
49  Rule 600(b)(9) of Regulation NMS generally defines “average realized spread” as the share-weighted 

average of realized spreads for order executions calculated, for buy orders, as double the amount of 

difference between the execution price and the midpoint of the NBB and NBO five minutes after the time 

of order execution and, for sell orders, as double the amount of difference between the midpoint of the 

NBB and NBO five minutes after the time of order execution and the execution price. 

50  The analysis in section VII.B.4 below uses a one-minute period to reflect the increase in trading speed in 

the years since Rule 605 was adopted.  

51  Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75424 (Dec. 1, 2000). 

52  Id. 

53  See, e.g., Harris Treatise at 286 (“Informed traders buy when they think that prices will rise and sell 

otherwise. If they are correct, they profit, and whoever is on the other side of their trade loses. When 

dealers trade with informed traders, prices tend to fall after the dealer buys and rise after the dealer sells. 

These price changes make it difficult for dealers to complete profitable round-trip trades. When dealers 

trade with informed traders, their realized spreads are often small or negative. Dealers therefore must be 

very careful when trading with traders they suspect are well informed.”). 



29 

 

 

When the execution quality and trading cost measures described above are calculated and 

averaged for a large volume of orders at different trading centers, the results can reveal important 

information about the nature of the order execution quality and trading costs across different 

trading centers. Section VII below, which provides an economic analysis of Proposed Rule 615, 

makes extensive use of data analyses using these measures.  

The following two examples are patterned on those analyses, particularly the empirical 

finding that the marketable orders of individual investors routed to wholesalers have adverse 

selection costs (as measured by price impact) that, on average, are approximately 71% lower 

than the marketable orders routed to national securities exchanges. The examples are intended to 

illustrate how quantitative measures of order execution quality and trading costs are calculated in 

these two contexts that are most relevant for understanding the empirical basis for Proposed Rule 

615. The examples show how a difference in the adverse selection costs of order flow routed to 

two different trading centers can result in more price improvement and narrower effective 

spreads at the trading center with lower adverse selection costs (the wholesaler) than at the 

trading center with higher adverse selection costs (the exchange), yet still result in wider realized 

spreads (i.e., spreads realized by the liquidity provider after estimating for adverse selection 

costs) at the wholesaler than at the exchange. 

The first example below (“Exchange Example”) presents the execution of an 

unsegmented marketable order to buy at a national securities exchange at a price that matches the 

NBBO, and the second example below (“Wholesaler Example”) presents the execution of a 

segmented marketable order to buy of an individual investor at a wholesaler at a price better than 

the NBBO. The examples use the calculation methodology prescribed by Rule 605 of Regulation 



30 

 

NMS, except that statistics are presented for the half-spread associated with a single buy or sell 

order rather than the full spread statistics prescribed for Rule 605, which are doubled to reflect 

estimates of round-trip (offsetting buy and sell) trading costs.54 Half-spreads are used to more 

clearly present the calculations for the single order in each of the examples. 

The data used for the two examples are labeled as follows: execution price of marketable 

order (“ExP”), NBB at time of order receipt (“NBBt0”), NBO at time of order receipt (“NBOt0”), 

NBBO midpoint at time of order receipt (“MPt0”), and NBBO midpoint 5 minutes after time of 

order execution (“MPt5”).  

  

                                                
54  The definitions of “average effective spread” and “average realized spread” provided in Rule 600(b)(8) and 

(9) of Regulation NMS, which are incorporated in Rule 605, prescribe doubling of the amounts by which 

an order execution price differs from the NBBO midpoint at the time of order receipt (for effective spreads) 

and five minutes after the time of order execution (for realized spreads). 



31 

 

The execution quality and trading cost measures for the two examples of marketable 

orders to buy are calculated as follows: 

NBBO quoted half-spread:  ½ x (NBOt0 – NBBt0) 

NBBO price improvement: NBOt0 – ExP 

Effective half-spread: ExP – MPt0 

Price impact: MPt5 – MPt0 

Realized half-spread: ExP – MPt5 

 

The data and calculations for the two examples are as follows: 

 EXCHANGE 

EXAMPLE 

WHOLESALER 

EXAMPLE 

EXP $110.05 $110.04 

NBBT0 $110.00 $110.00 

NBOT0 $110.05 $110.05 

MPT0 $110.025 $110.025 

MPT5 $110.055 $110.035 

NBBO PRICE 

IMPROVEMENT: 

 

0 cents 

 

1 cent 

NBBO QUOTED HALF-

SPREAD:  

 

2.5 cents 

 

2.5 cents 

EFFECTIVE HALF-SPREAD: 2.5 cents 1.5 cents 

PRICE IMPACT: 3 cents 1 cent 

REALIZED HALF-SPREAD: <0.5 cents> 0.5 cents 

 

 In the Exchange Example and Wholesaler Example, the NBBO is the same at the time of 

order receipt for both marketable buy orders, but the national securities exchange in the 

Exchange Example executes the order at the NBO with no NBBO price improvement, while the 

wholesaler in the Wholesaler Example executes the marketable buy order with NBBO price 

improvement of one cent. Consequently, the NBBO quoted half-spread is the same for both 

trades (2.5 cents), but the effective half-spread is wider for the liquidity provider on the national 

securities exchange (2.5 cents) than for the wholesaler (1.5 cents) because of the 1 cent NBBO 

price improvement provided by the wholesaler. The price impact of the order routed to the 

national securities exchange is 3 cents, while the price impact of the order routed to the 



32 

 

wholesaler is only 1 cent. Accordingly, the adverse selection cost for the liquidity provider on 

the national securities exchange was 3 cents, while the adverse selection cost for the wholesaler 

was 1 cent. 

The difference in adverse selection costs leaves the liquidity provider on the national 

securities exchange in the Exchange Example with a narrower realized half-spread of negative 

0.5 cents, while the wholesaler in the Wholesaler Example preserves a positive realized half-

spread of 0.5 cents. Stated another way, the wholesaler provided some NBBO price improvement 

(1 cent), but its adverse selection cost savings compared to the liquidity provider on the national 

securities exchange was 2 cents, and as a result the wholesaler was able to capture a realized 

half-spread that was one cent wider than the liquidity provider on the national securities 

exchange. If, however, the wholesaler had provided NBBO price improvement that matched its 

cost savings, the individual investor would have received NBBO price improvement of 2 cents 

rather than 1 cent. In this case, the realized half-spread for both the wholesaler and the liquidity 

provider on the national securities exchange would have been the same — negative 0.5 cents. 

 In this respect, the Exchange Example and Wholesaler Example highlight the key order-

by-order competition objective of Proposed Rule 615. As discussed in section VII.C.2.b below, 

competition among a wide range of liquidity providers on national securities exchanges is 

intense and results in realized spreads for unsegmented orders that are narrower than the realized 

spreads captured by wholesalers for the segmented orders of individual investors. Another way 

of stating the same point is that wholesalers do not provide average NBBO price improvement 

that matches their savings in average adverse selection costs from securing the opportunity to 

trade first with the segmented orders of individual investors. Proposed Rule 615 would enable 

order-by-order competition to provide the best prices to the segmented marketable orders of 



33 

 

individual investors. By providing an opportunity for a wide variety of liquidity providers to 

compete to provide the best prices for the segmented marketable orders of individual investors, 

Proposed Rule 615 is designed to expand the level of NBBO price improvement currently 

provided by wholesalers to match the low adverse selection costs of such orders.  

III. Statutory and Regulatory Background 

The development of today’s market structure for NMS stocks has been guided by the 

Congressional determination set forth in section 11A of the Exchange Act that the United States 

should have an NMS in which multiple competing markets are linked together through 

communications and data processing facilities. This section III first will discuss the Exchange 

Act framework for an NMS. It then will summarize the rules that the Commission has adopted 

over the years to facilitate the development of an NMS, with particular focus on rules that 

address the handling and execution of investor orders in NMS stocks. Many aspects of Proposed 

Rule 615, as described in section IV below, are designed to build on the existing statutory 

framework and Commission rules discussed in this section III. 

A. Statutory Framework for an NMS 

Section 11A of the Exchange Act, enacted as part of the Securities Acts Amendments of 

1975,55 sets forth the statutory framework for an NMS. Section 11A(a)(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 an NMS for securities in accordance with the Congressional findings and 

objectives set forth in section 11A(a)(1) of the Exchange Act.56 Section 11A(a)(1)(C) sets forth 

                                                
55  Pub. L. 94-29, 89 Stat. 97 (1975). 

56  Section 11A(a)(3)(B) also provides the Commission the authority to require the SROs, by rule or order, “to 

act jointly . . . in planning, developing, operating, or regulating [an NMS] (or a subsystem thereof).” 



34 

 

the finding of Congress that it is in the public interest and appropriate for the protection of 

investors and the maintenance of fair and orderly markets to assure five objectives: 

(1) economically efficient execution of securities transactions; 

(2) fair competition among brokers and dealers, among exchange markets, and between 

exchange markets and markets other than exchange markets; 

(3) the availability to brokers, dealers, and investors of information with respect to 

quotations for and transactions in securities; 

(4) the practicability of brokers executing investors’ orders in the best market; and 

(5) an opportunity, consistent with the foregoing objectives of efficient execution of 

securities transactions and practicability of brokers executing investors’ orders in the best 

market, for investors’ orders to be executed without the participation of a dealer.57 

A variety of Exchange Act provisions grant the Commission specific rulemaking 

authority in different contexts to fulfill its responsibility to facilitate the establishment of an 

NMS that assures the five objectives. Three of these Exchange Act authorizations are particularly 

relevant in the context of rules to address the handling and execution of investor orders in NMS 

stocks.  

First, section 11A(c)(1)(E) addresses the routing of orders by broker-dealers. It 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 Exchange Act to assure that all 

exchange members and brokers-dealers transmit and direct orders for the purchase or sale of 

NMS stocks in a manner consistent with the establishment and operation of an NMS.58  

                                                
57  Section 11A(a)(1) of the Exchange Act.  

58  15 U.S.C. 78k-1(c)(1)(E). 



35 

 

Second, section 11A(c)(1)(F) grants rulemaking authority to assure equal regulation of all 

markets for NMS stocks, as well as of all exchange members and broker-dealers effecting 

transactions in NMS stocks.59 The meaning of the term “equal regulation” is specified in section 

3(b)(36), which provides that a class of persons or markets is subject to equal regulation if no 

member of the class has a competitive advantage over any other member thereof resulting from a 

disparity in their regulation under the Exchange Act which the Commission determines is unfair 

and not necessary or appropriate in furtherance of the purposes of the Exchange Act. 

Third, section 15(c)(5) addresses the practices of dealers, such as wholesalers. It 

authorizes the Commission to prescribe rules setting forth specified and appropriate standards 

with respect to dealing for dealers (other than specialists registered on a national securities 

exchange) acting in the capacity of a market maker or otherwise that are necessary or appropriate 

in the public interest and for the protection of investors, to maintain fair and orderly markets, or 

to remove impediments to and perfect the mechanism of an NMS.60 

In addition to these grants of rulemaking authority to facilitate the development of an 

NMS, section 6 of the Exchange Act61 specifically addresses the types of access to trading 

services that one type of market — a national securities exchange — is required to provide to 

broker-dealers and market participants. Access to the trading services of a market is essential for 

that market to be linked together with other markets in an NMS. 

First, section 6(b)(2) requires that, subject to the provisions of section 6(c) relating to 

statutory disqualification and other concerns, the rules of the exchange must provide that any 

                                                
59  15 U.S.C. 78k-1(c)(1)(F). 

60  15 U.S.C. 78o(c)(5). 

61  15 U.S.C. 78f. 



36 

 

registered broker-dealer may become a member of such exchange.62 Broker-dealers generally 

need to become exchange members, as an initial matter, to obtain access to many of the trading 

services of an exchange. 

Second, section 6(b)(4) requires that the rules of the exchange provide for the equitable 

allocation of reasonable dues, fees, and other charges among its members and issuers and other 

persons using its facilities.63 This provision recognizes that the opportunity for different market 

participants to access trading services at a market can be greatly affected by the charges for those 

services. 

Third, section 6(b)(5) requires that the rules of the exchange are designed to, among other 

things, “remove impediments to and perfect the mechanism of a free and open market and [an 

NMS], and, in general, to protect investors and the public interest.”64 Section 6(b)(5) further 

requires that the rules of the exchange are not designed “to permit unfair discrimination between 

customers, issuers, brokers, or dealers.”65 These provisions broadly help ensure fair and efficient 

access to the trading services of national securities exchanges, both by requiring them to act 

affirmatively to promote high quality markets and by prohibiting them from acting negatively by 

unfairly discriminating between customers, issuers, or broker-dealers. 

Finally, section 6(b)(8) requires that “the rules of the exchange do not impose any burden 

on competition not necessary or appropriate in furtherance of the purposes” of the Exchange 

                                                
62  15 U.S.C. 78f(b)(2). 

63  15 U.S.C. 78f(b)(4). 

64  15 U.S.C. 78f(b)(5). 

65  Id.  



37 

 

Act.66 This provision further restricts a national securities exchange’s ability to limit access to its 

trading services in an anti-competitive manner.  

To help ensure that national securities exchanges operate according to rules consistent 

with their statutory obligations, section 19(b)(1) of the Exchange Act67 requires SROs,68 

including national securities exchanges, to file with the Commission any proposed rule change.69 

The Commission publishes for public comment all SRO proposed rule changes.70 For new or 

materially modified trading services, a proposed rule change generally cannot become effective, 

and the national securities exchange cannot implement such rule change, until the Commission 

has approved it as consistent with the requirements of the Exchange Act.71 

Section 15A of the Exchange Act72 includes many requirements for the rules of a national 

securities association that are analogous to those prescribed for national securities exchanges. 

FINRA is currently the only registered national securities association. Broker-dealers that handle 

                                                
66  15 U.S.C. 78f(b)(8). 

67  15 U.S.C. 78s(b)(1). 

68  See 15 U.S.C. 78c(b)(26) (defining “self-regulatory organization” to include, among other things, any 

national securities exchange or registered securities association).  

69  Section 19(b)(1) of the Exchange Act defines a “proposed rule change” to be any proposed change in, 

addition to, or deletion from the rules of an SRO. 15 U.S.C. 78s(b)(1). Section 3(a)(27) of the Exchange 

Act generally defines “rules” to include the constitution, articles of incorporation, bylaws, and rules, or 

instruments corresponding to the foregoing and the stated policies, practices, and interpretations of an 

exchange, association, or clearing agency as the Commission, by rule, may determine to be necessary or 

appropriate in the public interest or for the protection of investors to be deemed to be rules of such 
exchange, association, or clearing agency. 15 U.S.C. 78c(a)(27). Rule 19b-4(b) under the Exchange Act 

defines “stated policy, practice, or interpretation” to mean, in part, any material aspect of the operation of 

the facilities of the SRO or any statement made generally available that establishes or changes any 

standard, limit, or guideline with respect to the rights, obligations, or privileges of persons or the meaning, 

administration, or enforcement of an existing rule. 17 CFR 240.19b-4(b).  

70  See 15 U.S.C. 78s(b)(1). 

71  If the Commission does not approve or disapprove a proposed rule change within the required timeframe 

prescribed by section 19 of the Exchange Act, it is “deemed to have been approved.” 15 U.S.C. 

78s(b)(2)(D).  

72  15 U.S.C. 78o-3. 



38 

 

customer orders in NMS stocks or trade NMS stocks in the off-exchange market generally must 

become FINRA members.73 Section 15A does not, however, impose fair access requirements on 

the broker-dealer members of FINRA. Accordingly, broker-dealers that trade internally are not 

subject to the statutory access requirements that apply to national securities exchanges under 

section 6 of the Exchange Act. 

B. Current Regulatory Components of the NMS for NMS Stocks 

Over the years since 1975, the Commission has used its Exchange Act authority to adopt 

a series of rules to fulfill its regulatory responsibility to facilitate the establishment of an NMS. 

In doing so, it particularly has emphasized the importance of promoting competition as a means 

to protect investors and to achieve the five statutory objectives for an NMS. In its request for 

comment on issues relating to market fragmentation in 2000,74 for example, the Commission 

stated that the section 11A findings and objectives can be summed up in two fundamental 

principles. First, the interests of investors (both large and small) are preeminent, “especially the 

efficient execution of their securities transactions at prices established by vigorous 

competition.”75 Second, investor interests are best served by a market structure that, to the 

greatest extent possible, maintains the benefits of “both an opportunity for interaction of all 

buying and selling interest” in individual securities and “fair competition among all types of 

market centers” seeking to provide a forum for the execution of securities transactions.76 The 

                                                
73  See 15 U.S.C. 78o(b)(8). The Commission has proposed to amend 17 CFR 240.15b9-1, which provides an 

exemption from association membership for certain exchange members. Securities Exchange Act Release 

No. 95388 (July 29, 2022), 87 FR 49930 (Aug. 12, 2022) (proposing to replace a de minimis allowance 

with narrower exemptions from association membership). 

74  Securities Exchange Act Release No. 42450 (Feb. 23, 2000), 65 FR 10577 (Feb. 28, 2000) (“Market 

Fragmentation Concept Release”). 

75  Id. at 10580. 

76  Id. (emphasis in original). 



39 

 

Commission further stated that competition among multiple competing markets can isolate 

investor orders and that this “may reduce competition on price, which is one of the most 

important benefits of greater interaction of buying and selling interest in an individual 

security.”77 

In 2005, the Commission adopted Regulation NMS to consolidate the NMS rules it had 

previously adopted under section 11A and to include new rules designed to modernize and 

strengthen equity market structure.78 It again emphasized the importance of competition among 

orders to obtain the best prices for investors, stating that this basic principle was recognized in 

the legislative history of section 11A: “Investors must be assured that they are participants in a 

system which maximizes the opportunities for the most willing seller to meet the most willing 

buyer.”79 The Commission summed up its approach to achieving an NMS as resisting 

suggestions that it adopt an approach focusing on a single form of competition that, while 

perhaps easier to administer, “would forfeit the distinct, but equally vital, benefits associated 

with both competition among markets and competition among orders.”80 

Four categories of the Regulation NMS rules are particularly important in the context of 

Proposed Rule 615: (1) consolidated market data; (2) order handling and execution; (3) access to 

trading centers; and (4) disclosure of order routing practices and order execution statistics. 

                                                
77  Id. (emphasis in original).  

78  Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (“Regulation 

NMS Adopting Release”). 

79  Id. at 37499 (quoting H.R. Rep. 94-123, 94th Cong., 1st Sess. 50 (1975)). The Commission further quoted 

this legislative history for section 11A of the Exchange Act to emphasize the importance of ensuring that 

investor orders are able to be executed in a market with the best price: “‘market fragmentation becomes of 

increasing concern in the absence of mechanisms designed to assure that public investors are able to obtain 

the best price for securities regardless of the type or physical location of the market upon which his 

transaction may be executed.’” Id. at 37499 n.13. 

80  Id. 



40 

 

 

Several rules under Regulation NMS set forth requirements for consolidated market data, 

which, as defined in Rule 600(b)(19) and (21) of Regulation NMS, includes information 

concerning quotations and transactions in NMS stocks. 17 CFR 242.601 (“Rule 601”) provides 

for the dissemination of transaction information; 17 CFR 242.602 (“Rule 602”) provides for the 

dissemination of quotation information; 17 CFR 242.603 (“Rule 603”) requires, among other 

things, the national securities exchanges and national securities associations to act jointly for 

disseminating consolidated market data; and 17 CFR 242.608 (“Rule 608”) addresses the joint-

NMS plans that currently are responsible for operating the facilities for collecting and 

disseminating consolidated market data in NMS stocks.  

In 2020, the Commission adopted a new rule and amended existing rules to establish a 

new infrastructure for consolidated market data and to update and significantly expand the 

content of consolidated market data (“MDI Rules”).81 The MDI Rules have not yet been 

implemented and, as discussed below, given their unimplemented status, the description of 

Proposed Rule 615 in section IV below reflects the regulatory structure currently in place for 

consolidated market data. Section VII below addresses the economic effects of Proposed Rule 

615, taking into account both the regulatory structure currently in place and the unimplemented 

MDI Rules. This section III.B.1 first will briefly summarize the currently implemented 

regulatory structure for consolidated market data. It then will discuss the status of the 

                                                
81  Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596 (Apr. 9, 2021) (“MDI Adopting 

Release”); see also The Nasdaq Stock Market LLC, et al v. SEC, No. 21-1100 (D.C. Cir. May 24, 2022) 

(upholding these Commission amendments to market data rules adopted in the MDI Adopting Release). 
The MDI Adopting Release provides a comprehensive discussion of the current arrangements for 

consolidated market data, as well as the adopted but unimplemented rules to change these current 

arrangements.41 

 

implementation of MDI Rules and how it would not affect the operation of and need for 

Proposed Rule 615. 

 

As stated in section II.B above, consolidated market data currently is collected and 

disseminated by the centralized SIPs. For quotation information, only the 16 exchanges that 

currently trade NMS stocks provide quotation information to the SIPs for dissemination in 

consolidated market data.82 FINRA has the only SRO display-only facility (the ADF) for 

quotations. No broker-dealer, however, currently uses the ADF to display quotations in NMS 

stocks in consolidated market data. For transaction information, all of the national securities 

exchanges that trade NMS stocks and FINRA provide real-time transaction information to the 

SIPs for dissemination in consolidated market data. Such information includes the symbol, price, 

and size of the transaction. A notable difference, however, between the transaction information 

provided by the national securities exchanges and the transaction information provided by 

FINRA is that the identity of the particular exchange that executed a trade is included in 

consolidated market data, while the identity of the particular FINRA member responsible for 

                                                
82  Currently, these national securities exchanges are: Cboe BYX Exchange, Inc. (“Cboe BYX”); Cboe BZX 

Exchange, Inc. (“Cboe BZX”); Cboe EDGA Exchange, Inc. (“Cboe EDGA”); Cboe EDGX Exchange, Inc. 

(“Cboe EDGX”); Investors Exchange LLC (“IEX”); Long-Term Stock Exchange, Inc. (“LTSE”); MEMX 

LLC (“MEMX”); MIAX Pearl, LLC (“MIAX PEARL”); Nasdaq BX, Inc. (“Nasdaq BX”); Nasdaq PHLX 
LLC (“Nasdaq Phlx”); The Nasdaq Stock Market LLC (“Nasdaq”); NYSE; NYSE American LLC (“NYSE 

American”); NYSE Arca, Inc. (“NYSE Arca”); NYSE Chicago, Inc. (“NYSE CHX”); and NYSE National, 

Inc. (“NYSE National”). The Commission approved rules proposed by BOX Exchange LLC (“BOX”) for 

the listing and trading of certain equity securities that would be NMS stocks on a facility of BOX known as 

BSTX LLC (“BSTX”), but BSTX is not yet operational. See Securities Exchange Act Release Nos. 94092 

(Jan. 27, 2022), 87 FR 5881 (Feb. 2, 2022) (SR-BOX-2021-06) (approving the trading of equity securities 

on the exchange through a facility of the exchange known as BSTX); 94278 (Feb. 17, 2022), 87 FR 10401 

(Feb. 24, 2022) (SR-BOX-2021-14) (approving the establishment of BSTX as a facility of BOX). BSTX 

cannot commence operations as a facility of BOX until, among other things, the BSTX Third Amended and 

Restated Limited Liability Company Agreement approved by the Commission as rules of BOX is adopted. 

Id. at 10407. 



42 

 

reporting a trade, such as a wholesaler or other type of broker-dealer, is not included in 

consolidated market data.83 

 

When implemented, the MDI Rules will modify the current regulatory structure for 

consolidated market data in two respects. First, they will enhance the content of consolidated 

market data by defining three new data elements as “core data”84 — (1) information about better 

priced quotations in higher priced stocks (to be implemented through a new definition of “round 

lot”85 and the inclusion of certain “odd-lot information”),86 (2) information about quotations that 

are outside of the best-priced quotations (to be implemented through a new “depth of book data” 

definition),87 and (3) information about orders that are participating in auctions (to be 

implemented through a new definition of “auction information”).88 As discussed below in section 

III.B.1.b.ii, the MDI Rules will enhance the content of consolidated market data, but the 

enhanced content of consolidated market data still will not include all of the quotation 

information currently available to market participants that purchase proprietary data feeds that 

are disseminated individually by national securities exchanges. Second, the MDI Rules will 

enhance the provision of consolidated market data by adopting a new decentralized model that 

                                                
83  Separate from the dissemination of real-time transaction information in consolidated market data, FINRA 

publishes statistics on trading volume at member firms, including ATSs and wholesalers, that are 

aggregated on a weekly basis. Publication of the aggregate volume statistics is delayed by two weeks for 
some NMS stocks and by four weeks for others. The statistics are available at https://www.finra.org/filing-

reporting/otc-transparency. 

84  The term “core data” is defined in section 600(b)(21) of Regulation NMS. 

85  The term “round lot” is defined in section 600(b)(82) of Regulation NMS. 

86  The term “odd lot information” is defined in section 600(b)(59) of Regulation NMS. 

87  The term “depth of book data” is defined in section 600(b)(26) of Regulation NMS. 

88  The term “auction information” is defined in section 600(b)(5) of Regulation NMS. 

https://www.finra.org/filing-reporting/otc-transparency
https://www.finra.org/filing-reporting/otc-transparency


43 

 

replaces the SIPs with “competing consolidators”89 and “self-aggregators.”90 Under the 

decentralized model, the relevant SROs (national securities exchanges that trade NMS stocks and 

FINRA) will be required to provide their data directly to multiple competing consolidators and 

self-aggregators rather than to a centralized SIP.91 

i. Implementation of the MDI Rules 

In the MDI Adopting Release in 2020, the Commission outlined a phased transition plan 

for the implementation of the MDI Rules.92 The first step was the filing of amendments to the 

effective NMS market data plan(s) as required under Rule 614(e) of Regulation NMS.93 The 

Commission’s approval of such amendments will be the starting point for the rest of the 

implementation schedule. While the Commission can approve NMS plan amendments within 90 

days of the date of their publication in the Federal Register if the Commission finds them to be 

consistent with the standards set forth in Rule 608 of Regulation NMS,94 the Commission may, 

under rule 608(b)(2)(i), institute proceedings to determine whether to approve or disapprove 

proposed amendments, which proceedings must conclude within 180 days of notice publication 

                                                
89  The term “competing consolidator” is defined in section 600(b)(16) of Regulation NMS. 

90  The term “self-aggregator” is defined in section 600(b)(83) of Regulation NMS. 

91  Rule 603(b) of Regulation NMS requires, among other things, 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 its information with respect to quotations for and transactions in NMS stocks. 

92  MDI Adopting Release, supra note 81, 86 FR at 18698-18701.  

93  17 CFR 242.614(e). The participants of the effective NMS market data plan(s) filed proposed amendments 

on Nov. 5, 2021, which were published for comment in the Federal Register. Securities Exchange Act 

Release Nos. 93615 (Nov. 19, 2021), 86 FR 67800 (Nov. 29, 2021); 93625 (Nov. 19, 2021), 86 FR 67517 

(Nov. 26, 2021); 93620 (Nov. 19, 2021), 86 FR 67541 (Nov. 26, 2021); 93618 (Nov. 19, 2021), 86 FR 

67562 (Nov. 26, 2021) (“MDI Plan Amendments”). 

94  17 CFR 242.608(b)(2). 



44 

 

of the proposed amendments but can be extended by an additional 120 days.95 Therefore, the 

maximum time permitted under rule 608 for Commission action is 300 days. 

After the Commission finds that the plan amendments required under Rule 614(e) are 

consistent with the Rule 608 standards and approves such amendments, the next step will be a 

180-day development period, during which competing consolidators can register with the 

Commission. The development period is followed by a 90-day testing period.96 Once the testing 

period concludes, a 180-day parallel operation period will begin during which the SIPs and the 

decentralized consolidation model will operate in parallel.97 

Within 90 days of the end of the parallel operation period, the operating committee(s) of 

the effective NMS plan(s), in consultation with relevant market participants, will make a 

recommendation to the Commission as to whether the SIPs should be decommissioned. The SIPs 

will only cease operations to the extent that the Commission approves an amendment pursuant to 

Rule 608 to the effective NMS plan(s) to effectuate such a cessation.98  

                                                
95  17 CFR 242.608(b)(2). The Commission instituted proceedings to determine whether to approve or 

disapprove the MDI Plan Amendments. Securities Exchange Act Release Nos. 94310 (Feb. 24, 2022), 87 

FR 11748 (Mar. 2, 2022); 94309 (Feb. 24, 2022), 87 FR 11763 (Mar. 2, 2022); 94308 (Feb. 24, 2022), 87 

FR 11755 (Mar. 2, 2022); 94307 (Feb. 24, 2022), 87 FR 11787 (Mar. 2, 2022). 

96  MDI Adopting Release, supra note 81, 86 FR at 18699-700. 

97  During the parallel operation period, the SIPs will continue to disseminate the data that they currently 

disseminate and competing consolidators will be permitted to offer consolidated market data products, 

including odd-lot information. Because the round lot definition will be implemented during a later phase 

consistent with the MDI Adopting Release, the SIPs and competing consolidators will collect, consolidate 
and disseminate NMS data that will be based on the current national securities exchange definitions of 

round lot. Id. at 18699-18701. 

98  Id. at 18701. Following the cessation of the operations of the SIPs, the changes necessary to implement the 

new round lot sizes will be tested for 90 days and then implemented. Id. The Commission also is proposing 

to accelerate implementation of the round lot sizes. See Securities Exchange Act Release No. 96494 (Dec. 

14, 2022) (File No. S7-30-22) (Regulation NMS: Minimum Pricing Increments, Access Fees, and 

Transparency of Better Priced Orders) (“Minimum Pricing Increments Proposal”). The Commission 

encourages commenters to review that proposal to determine whether it might affect their comments on this 

proposing release. 



45 

 

The plan participants of two effective NMS plans filed the MDI Plan Amendments on 

November 5, 2021.99 On September 21, 2022, the Commission disapproved the proposed 

amendments.100 As a result, new proposed amendments pursuant to Rule 608 will need to be 

developed and filed for implementation of the MDI Rules. 

The Commission does not believe that the subsequent implementation of the MDI Rules 

would substantially affect the operation of Proposed Rule 615. In the existing regulatory 

structure, the national securities exchanges and FINRA would be required to provide the SIPs 

with the necessary data (including the auction messages specified in Proposed Rule 615(c)(1)) 

and the quotation and transaction information specified in the proposed definition of “open 

competition trading center” in Proposed Rule 600(b)(64) of Regulation NMS). When the MDI 

Rules are subsequently implemented, a decentralized model would replace the SIPs, and the 

national securities exchanges and FINRA would provide this information directly to the 

competing consolidators and self-aggregators pursuant to Rule 603(b) of Regulation NMS.101  

As noted above, auction information is to be included in the expanded content of 

consolidated market data that can be disseminated by competing consolidators under the MDI 

Rules. Market participants in the decentralized model will have a choice of whether to purchase 

consolidated market data products that include auction information, as well as any of the other 

                                                
99  See supra note 93. 

100  Securities Exchange Act Release Nos. 95848 (Sept. 21, 2022), 87 FR 58544 (Sept. 27, 2022); 95849 (Sept. 

21, 2022), 87 FR 58592 (Sept. 27, 2022); 95850 (Sept. 21, 2022), 87 FR 58560 (Sept. 27, 2022); 95851 

(Sept. 21, 2022), 87 FR 58613 (Sept. 27, 2022). 

101  The MDI Adopting Release states that the benefits of a decentralized model for consolidated market data 

are gains in efficiency and innovation for delivering consolidated market data, reduced content and latency 

differentials between consolidated market data and proprietary market data, and increased market 

resiliency. MDI Adopting Release, supra note 81, 86 FR at 18778. As discussed in section III.B.1.b.ii 

below, the Commission does not believe that these benefits of the MDI Rules substantially reduce the need 

to propose Rule 615 to address the goals stated herein. 



46 

 

components of consolidated market data.102 The fees that ultimately are approved for the 

different components of consolidated market data will affect the extent to which market 

participants choose to purchase auction information,103 but, as discussed above, the fees are not 

known at this time. Any fees for auction information will be required to be fair, reasonable, and 

not unreasonably discriminatory,104 and, as such, the Commission does not anticipate that such 

fees would be so high as to deter a substantial number of market participants interested in 

participating in auctions under Proposed Rule 615 from purchasing consolidated data products 

that include auction information. 

ii. Implementation of the MDI Rules Will Not 

Substantially Reduce the Need to Propose Rule 615 to 

Address the Goals Stated Herein 

As stated in section I above, Proposed Rule 615 is designed to promote order-by-order 

competition and thereby achieve two primary goals for the benefit of investors — (1) obtain 

better prices for the execution of the marketable orders of individual investors that currently are 

segmented at wholesalers, and (2) expand opportunities for such individual investor orders to 

meet directly with other investor orders without the participation of a dealer (such as a 

wholesaler). The MDI Rules would not substantially reduce the need to propose Rule 615 to 

address the goals stated herein. 

                                                
102  See, e.g., id. at 18751 (competing consolidators will not be required to offer consolidated market products 

that “include all of the content of expanded core data” and market participants “may choose not to take in 

all of the new core data elements in every instance.”).  

103  See, e.g., id. at 18764 (because fees will depend on future action by the effective NMS system plans, 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 consolidated market data). 

104  See, e.g., id. at 18773 (the fees for the data content underlying consolidated market data must be “fair, 

reasonable and not unreasonably discriminatory”). 



47 

 

The MDI Rules will enhance the content of consolidated market data and thereby benefit 

those market participants that currently use SIP data and decide to purchase the enhanced 

elements of consolidated market data. As the MDI Adopting Release stated, however, 

implementation of the MDI Rules will not expand the content of data already available to 

sophisticated market participants that purchase the proprietary data feeds that are individually 

disseminated by the national securities exchanges.105 The Commission stated its understanding 

that “approximately 50 to 100 firms purchase all of the proprietary [depth-of-book] feeds from 

the exchanges and do not rely on the SIP data for their trading.”106 Moreover, these 50 to100 

firms that currently use proprietary data feeds play a significant role in the current market 

structure.107 For example, the MDI Adopting Release stated that “nearly all orders entered in the 

[NMS], including retail orders, touch a component (typically the order router of the executing 

broker) that uses proprietary data in order to reduce execution costs and improve execution 

quality.”108 Furthermore, the Commission understands that the wholesalers, as six of the highest 

volume trading firms in the U.S. equity markets, currently pay for and use the proprietary data 

feeds. One wholesaler submitted a comment on the MDI Rules stating that it would be unable to 

remain competitive, even after the MDI Rules were implemented, without continuing to purchase 

proprietary data feeds.109 

                                                
105  See, e.g., id. at 18752 (“[a]lthough expanded core data will not contain all of the data contained in 

proprietary [depth of book] feeds, the Commission believes that it will contain data that will be useful for 

market participants”); id. at 18754 (the potentially lower cost of consolidated market data “will come at the 

expense of losing the full set of data currently available via proprietary feeds,” because the consolidated 

market data definition “does not include all data elements currently available via proprietary data feeds.”). 

106  Id. at 18728. 

107  See, e.g., id. at 18734 n. 1724 (Commission analysis showed that 91.6% of the message volume on 

exchanges in a sample week came from just 50 firms that use proprietary data feeds). 

108  Id. at 18734. 

109  Id. at 18793 n. 2386 (commenters agreed that “switching to new consolidated market data would come with 

this expense of losing some data compared to the proprietary data feeds,” with one stating that it would be 



48 

 

Statements in the MDI Adopting Release addressing the benefits of the MDI Rules are 

consistent with a conclusion that the MDI Rules can benefit SIP data users that currently do not 

purchase the proprietary data feeds, but will not substantially reduce the need to propose Rule 

615 to address the goals stated herein. For example, the MDI Adopting Release stated that the 

“odd-lot aggregation methodology” of the MDI Rules “would benefit market participants by 

promoting tighter spreads in all stocks, especially high priced ones.”110 All of the odd lot 

quotations that will be aggregated, however, were already included in an order-by-order basis in 

the proprietary data feeds that the Commission understands the wholesalers use. As the MDI 

Adopting Release stated, the inclusion of odd-lot quote information in core data will improve 

transparency and “reduce information asymmetry between market participants who already 

receive this information through proprietary [depth-of-book] feeds and market participants who 

choose to subscribe to this aspect of core data and previously did not receive this information.111  

In addition, the MDI Adopting Release states that “because richer, more timely 

consolidated market data may enhance the ability of broker-dealers to obtain the most favorable 

terms reasonably available under the circumstances, including the best reasonably available price 

and other factors, for their customer orders, broker-dealers should consider the availability of 

consolidated market data for purposes of evaluating best execution.”112 The availability of 

additional quotation information in consolidated market data, however, is unlikely to affect the 

                                                
“unable to remain competitive even after the final amendments are in place without continuing to purchase 

proprietary data feeds.”); see also id. at 18795 (stating possibility that potential participants in automated 

market making and other latency sensitive trading businesses could not “compete effectively without using 

the data that would remain exclusive to proprietary feeds”). 

110  MDI Adopting Release, supra note 81, 86 FR at 18615. 

111  Id. at 18753. 

112  Id. at 18605 (footnotes omitted). 



49 

 

wholesalers’ and retail brokers’ evaluation of best execution because the Commission 

understands that wholesalers already would be expected, under FINRA guidance,113 to use a 

more complete set of quotation information (i.e., proprietary data feeds) than will be available in 

the expanded MDI data when evaluating best execution today, and retail brokers use wholesalers 

as executing brokers to obtain the best terms reasonably available.  

The MDI Adopting Release also stated that “as a result of the new round lot definition 

and the inclusion of odd-lot quotations in core data, retail investors will be able to see, and more 

readily access, better-priced quotations.”114 Such information will, depending on the fees yet to 

be determined for such information (as stated above), enable those retail investors that purchase 

such information (or for those retail investors whose broker-dealers purchase it for them) to see 

and more readily access better-priced quotations than the current NBBO disseminated by the 

SIPs. To do so, retail investors will need to direct their own orders to the particular trading center 

that is displaying a better-priced quotation. As stated in the MDI Adopting Release, however, 

most retail investors rely on their broker-dealers for execution of their orders, and the additional 

quotation information will likely be used by more sophisticated retail investors that are able to 

process quotation information and self-direct their orders.115  

                                                
113  The MDI Adopting Release referred to this FINRA guidance concerning the relevance of proprietary data 

feeds to a broker-dealer’s best execution efforts under FINRA rules. Id. at 18605 n. 94 (quoting FINRA 

Notice to Members 15-46, Guidance on Best Execution Obligations in Equity, Options and Fixed Income 

Markets at 3 n. 12 (Nov. 2015), available at https://www.finra.org/rules-guidance/notices/15-46 (“FINRA 

Notice 15-46”). The relevant portion of FINRA Notice 15-46 provides the following guidance on 

compliance with FINRA Rule 5310: “[A] firm that regularly accesses proprietary data feeds, in addition to 

the consolidated SIP feed, for its proprietary trading, would be expected to also be using these data feeds to 

determine the best market under prevailing market conditions when handling customer orders to meet its 

best execution obligations.” 

114  Id. at 18601. 

115  See, e.g., id. at 18753 (“the Commission believes, as suggested by commenters, that retail brokers may 

allow some sophisticated retail investors to directly utilize the expanded content of core data and realize the 

benefits discussed below”). 

https://www.finra.org/rules-guidance/notices/15-46


50 

 

The MDI Adopting Release also stated that “through the addition of depth of book data 

and auction information in core data, the scope of NMS information will, to a greater extent, 

allow some market participants to trade in a more informed, competitive, and efficient 

manner.”116 The phrase “some market participants” as discussed above, refers to those market 

participants that currently rely on SIP data for trading and not the proprietary data feeds. For the 

marketable orders of individual investors that currently are routed to wholesalers, the expansion 

of depth of book data in consolidated market data will not affect the information used for their 

execution because the Commission understands that wholesalers currently use proprietary data 

feeds for evaluating the best execution of their orders, which include more information than the 

expanded consolidated market data of the MDI Rules. 

An aspect of the MDI Rules that will affect the public evaluation of wholesaler order 

execution quality is smaller round lot sizes for quotations in NMS stocks with prices greater than 

$250 per share. These quotations determine the NBBO, and smaller round lot sizes can lead to 

narrower NBBO spreads. As discussed in section II above, the NBBO is a benchmark used to 

assess the market for an NMS stock, as well as to retrospectively assess the level of execution 

quality for an order. Accordingly, although implementation of the MDI Rules will not increase 

the information available to wholesalers in proprietary data feeds, changes in the round lot 

definition could narrow the NBBO as a public benchmark for the execution quality of the 

marketable orders of individual investors. 

The Commission does not believe, however, the smaller round lot sizes for NMS stocks 

with prices that exceed $250 per share will substantially affect the need for Proposed Rule 615 in 

terms of improved order execution quality for the marketable orders of individual investors. In 

                                                
116  Id. at 18601. 



51 

 

particular, Proposed Rule 615 would encompass all NMS stocks, while the new round lot 

definition will encompass a much smaller range of NMS stocks and trading volume. In the MDI 

Adopting Release, for example, Table 3 and Table 4 set out the range of stocks and volume 

estimated to be affected by the new round lot definition. This information is summarized below: 

Round Lot Tier 
Number of 

NMS Stocks 

% Average 

Daily Share 

Volume 

% Average 

Daily Dollar 

Volume 

% Instances of 

Smaller NBBO 

$0-$250 9,023 97.12 71.93 n/a 

$250.01-$1,000 117 2.79 23.24 26.6 

$1,000.01-$10,000 16 0.09 4.82 47.7 

$10,000+ 1 0.00 0.02 n/a 

 

First, as stated in the MDI Adopting Release, “most stocks, approximately 98.5%, will 

remain unaffected” by the new round lot definition.117 The 98.5% of unaffected NMS stocks with 

prices of $250 or less represented 97.12% of total NMS stock share volume and 71.93% of total 

NMS stock dollar volume. Thus, the great majority of NMS stocks and their volume would not 

be affected by the narrowing of the NBBO benchmark that will result from the new round lot 

definition in the MDI Rules.118 

Second, for the estimated 1.5% of high-priced NMS stocks (over $250) that will be 

affected by the reduction in round lot sizes, the Commission estimated that most of the dollar 

volume (23.24% of total NMS stock dollar volume) will occur within the $250.01-$1000 tier, but 

in this tier, the NBBO spread will be reduced for only 26.6% of the trading day.119 For the 

remaining 73.4% of the trading day in these NMS stocks, the NBBO spread in these NMS stocks 

                                                
117  MDI Adopting Release, supra note 81, 86 FR at 18743 (Table 4). 

118  Id. at 18753 (“Even though the new round lot definition would expand information on odd-lots that may be 

priced better than the current NBBO in some stocks, most stocks would not be affected by the new round 

lot definition.”) (footnotes omitted). 

119  Id. at 18743 (Table 3). 



52 

 

will be unaffected.120 Accordingly, even for the 1.5% of NMS stocks that will be affected by the 

revised round lot definition, NBBO spreads were estimated to remain unaffected for the most of 

the trading day. 

This conclusion is consistent with statements in the MDI Adopting Release. For example, 

the MDI Adopting Release states that “the size of the change in the NBBO spread, conditional 

on the NBBO being smaller, will also be substantial.”121 The phrase “conditional on the NBBO 

being smaller”122 means that the reduction in size of the half spread is limited to the 1.5% of 

stocks and their volume that, as discussed above, will be affected by the new odd lot definition. 

As a result, there will be a significant reduction in half spread of the NBBO for those stocks, but 

this reduction is conditional on the minority of the trading day for 1.5% of NMS stocks when 

NBBO spreads actually will be affected by the new round lot definition.  

Third and finally, the NBBO as a benchmark for order execution quality does not, as 

discussed in section II.C above, reflect the availability of prices better than round lot displayed 

quotations. Such better prices include displayed odd lot quotations and undisplayed orders at 

national securities exchanges, as well as the availability of NBBO price improvement at 

wholesalers that is enabled by the low adverse selection costs of the marketable orders of 

individual investors. In the MDI Adopting Release, the Commission considered whether a 

                                                
120  Id. (Table 4). For NMS stocks with prices of $1000.01 to $10,000, which represented 4.82% of trading 

volume, the Commission estimated that, taking into account the new round lot definition, the NBBO spread 

would be reduced to some extent for 47.7% of the trading day. Id. (Tables 3-4). 

121  Id. at 18744. 

122  Similarly, the following statement in the MDI Adopting Release is conditional on those instances where the 

NBBO spread is smaller: “The Commission believes that, in particular, for securities with a significant 

amount of dollar trading volume, there will be significant changes to (tightening of) the quoted spread 

displayed under the new round lot definition.” Id. at 18743. 



53 

 

narrowing of the NBBO spread would affect the order execution quality of retail investors.123 

While it stated that a narrowing of the NBBO spread would, by definition, reduce the level of 

NBBO price improvement if execution prices for retail investors remained the same,124 the 

Commission stated that “retail investors might or might not” experience an improvement in 

execution quality, “as measured by execution prices,” from wholesalers.125 The Commission 

stated that a retail broker commented that retail investors would not receive better execution 

prices under the new round lot sizes because wholesalers already offer price improvement to 

retail investors that exceeds the potential improvements in the NBBO from the new round lot 

size.126 Another commenter stated that all investors, including retail investors, would experience 

reduced execution costs from a tighter NBBO no matter where the execution took place.127 The 

Commission concluded that it was “uncertain” whether the execution quality that retail investors 

receive from wholesalers would change if the NBBO spread narrows because the effect “would 

depend on how the change in the NBBO compared to the current price improvement offered by 

wholesalers,” as well as on “changes in the degree of price improvement wholesalers will offer 

in stocks with tighter NBBOs, which is uncertain.”128  

As stated above, the Commission understands that wholesalers already would be 

expected, under FINRA guidance, to use proprietary data feeds, which contain a fuller set of 

                                                
123  Id. at 18747 (section addressing “effects of internalization on retail order flow”). 

124  Id. (“it may become more difficult for the retail execution business of wholesalers to provide price 

improvement and other execution quality metrics at levels similar to those provided under the 100 share 

round lot definition today”). 

125  Id. 

126  Id. 

127  Id. 

128  Id. 



54 

 

quotations than will be included in the new round lot definition, when, among other things, 

evaluating best execution. Consequently, the new round lot definition will not change the 

quotation data used by wholesalers to determine prices for executing the orders of individual 

investors, but rather will change the NBBO as benchmark for analysis of order execution quality 

at wholesalers.129 Moreover, narrowing the NBBO as a benchmark for execution quality of 

wholesalers will affect all wholesalers equally. For example, if the average NBO for an NMS 

stock declined by two cents, the NBO as a benchmark would reduce the calculation of NBBO 

price improvement by two cents for all wholesalers and therefore leave them in the same relative 

position when compared to each other. The Commission does not believe that implementation of 

the new round lot definition in the MDI Rules will substantially affect the need for Proposed 

Rule 615 in terms of an improvement in the order execution quality of the marketable orders of 

individual investors. 

 

Broker-dealers owe their customers a duty of best execution when handling and 

executing customer orders.130 This duty of best execution derives from common law agency 

principles and fiduciary obligations, and is incorporated in SRO rules and enforced through the 

antifraud provisions of the Federal securities laws.131 The Commission has stated that “the duty 

                                                
129  Id. at 18745 (“the new round lot definition will also improve transaction cost analysis and best execution 

analysis in higher priced stocks, which are benchmarked against the NBBO”). 

130  The Commission also is proposing a new rule addressing the best execution obligations of broker-dealers. 
See Securities Exchange Act Release No. 96496 (Dec. 14, 2022) (File No. S7-32-22) (Regulation Best 

Execution) (“Regulation Best Execution Proposal”). The Commission encourages commenters to review 

that proposal to determine whether it might affect their comments on this proposal. 

131  See MDI Adopting Release, supra note 81, 86 FR at 18605. In addition, FINRA has codified a duty of best 

execution in its rules, requiring a broker-dealer to “use reasonable diligence to ascertain the best market for 

the subject security and buy or sell in such market so that the resultant price to the customer is as favorable 

as possible under prevailing market conditions.” FINRA Rule 5310, “Best Execution and Interpositioning.” 



55 

 

of best execution generally requires broker-dealers to execute customers’ trades at the most 

favorable terms reasonably available under the circumstances, i.e., at the best reasonably 

available price.”132 Broker-dealers should periodically assess the quality of competing markets to 

assure that order flow is directed to the markets providing the most beneficial terms for their 

customer orders.133 In doing so, broker-dealers must take into account price improvement 

opportunities, and whether different markets may be more suitable for different types of orders 

or particular securities.134  

After the enactment of section 11A in 1975, which included as an objective the 

practicability of brokers’ executing investor orders in the best market,135 the Commission 

adopted rules that prescribe requirements for the handling and execution of orders in NMS stocks 

in certain contexts. These rules were often designed, at least in part, to promote best execution of 

investors’ orders. Three rules in Regulation NMS, discussed below, specifically address the 

handling and execution of orders in NMS stocks — 17 CFR 242.604 (“Rule 604,” also known as 

the “Limit Order Display Rule”), 17 CFR 242.611 (“Rule 611,” also known as the “Order 

Protection Rule”), and 17 CFR 242.612 (“Rule 612,” also known as the “Sub-Penny Rule”).  

                                                
132 See MDI Adopting Release, supra note 81, 86 FR at 18605 (quoting Regulation NMS Adopting Release, 

supra note 78, 70 FR at 37538); see also Geman v. SEC, 334 F.3d 1183, 1186 (10th Cir. 2003) (quoting 

Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir. 1998)) (“[T]he duty of 

best execution requires that a broker-dealer seek to obtain for its customer orders the most favorable terms 

reasonably available under the circumstances.”); and Kurz v. Fidelity Management & Research Co., 556 

F.3d 639, 640 (7th Cir. 2009) (describing the “duty of best execution” as “getting the optimal combination 

of price, speed, and liquidity for a securities trade”). 

133  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37538. 

134  See id. 

135  Section 11A(a)(1)(C)(iv) of the Exchange Act; see also supra note 57 and accompanying text.  



56 

 

 

The Limit Order Display Rule was originally adopted in 1996 as Rule 11Ac1–4 and 

redesignated as Rule 604 with the adoption of Regulation NMS in 2005.136 It establishes 

minimum display requirements for customer limit orders that are not executed immediately, 

which, as discussed in section II.C above, can be referred to as “non-marketable” limit orders. In 

contrast to marketable limit orders, non-marketable limit orders cannot be executed immediately 

at the NBBO. Rule 604 requires specialists and OTC market makers to display the price and full 

size of customer limit orders when these orders represent buying and selling interest that is at a 

better price than a specialist’s or OTC market maker’s public quotation.137 Specialists and OTC 

market makers also must increase the size of their quotation for a particular security to reflect a 

limit order of greater than de minimis size when the limit order is priced equal to the specialist’s 

or OTC market maker’s disseminated quotation and that quotation is equal to the NBBO.138 

In adopting Rule 604, the Commission observed that the enhanced transparency of such 

orders would increase the likelihood that customer limit orders would be executed because 

contra-side market participants would have a more accurate picture of trading interest in a given 

security, and that the increased visibility would enable market participants to interact directly 

with limit orders, rather than rely on the participation of a dealer for execution.139 The 

                                                
136  Regulation NMS Adopting Release, supra note 78, 70 FR at 37570. Modifications included conforming 

terms to those adopted with Regulation NMS, such as changing references from “covered security” to 

“NMS stock.” Id. at 37572. 

137  Rule 604(b)(1) provides exceptions for, among other things, orders executed immediately upon receipt and 

odd lot orders. 

138  See Securities Exchange Act Release No. 37619A (Sep. 6, 1996), 61 FR 48290, 48290 (Sep. 12, 1996) 

(Order Execution Obligations) (adopting final rules to require the display of customer limit orders and 

amending a rule governing publication of quotations) (“1996 Order Handling Release”); Rule 604(a). 

139  See 1996 Order Handling Release, supra note 138, 61 FR at 48293. 



57 

 

Commission also stated that the display requirement (together with other amendments being 

made at the time) would help ensure the disclosure of customer and market maker buying and 

selling interest that had, prior to adoption of Rule 604, been hidden from many market 

participants.140 

 

In 2005, the Commission adopted the Order Protection Rule as Rule 611 of Regulation 

NMS. Rule 611(a) applies to “trading centers,” which is defined broadly in Rule 600(b)(95) as a 

national securities exchange or national securities association that operates an SRO trading 

facility, an ATS, an exchange market maker, an OTC market maker, or any other broker or 

dealer that executes orders internally by trading as principal or crossing orders as agent.  

Rule 611(a)(1) requires trading centers to implement written policies and procedures 

reasonably designed to prevent trade-throughs — the execution of an order at a price that is 

inferior to the price of a “protected quotation.”141 To be protected, a quotation must be 

immediately and automatically accessible up to its full displayed size, must be the best-priced 

quotation (highest bid to buy and lowest offer to sell) in round lot sizes of an exchange or 

                                                
140  Id. at 48292. The Commission also adopted amendments to require a market maker to publish quotations 

for any listed security when it is responsible for more than 1% of the aggregate trading volume for that 

security and to make publicly available any superior prices that a market maker privately quotes through 

certain electronic communications networks (“ECNs”). Id. at 48292. Also, at the same time it adopted the 
Limit Order Display Rule in 1996, the Commission deferred action on a proposed rule to address the 

handling of customer market orders of less than block size, referred to as the “Price Improvement Rule.” Id. 

at 48322. This proposed rule would have required specialists and OTC market makers to provide their 

customer market orders an opportunity for price improvement. The proposal included a non-exclusive safe 

harbor to satisfy the price improvement obligation that included exposing the customer order for 30 

seconds at an improved price in a published quotation. The proposal sought to improve opportunities in 

auction and dealer markets for market orders to interact directly with other market orders and public limit 

orders, consistent with the goals of an NMS. Id. 

141  Rule 600(b)(70) defines “protected bid” or “protected offer” as a quotation in an NMS stock that: (i) is 

displayed by an automated trading center; (ii) is disseminated pursuant to an effective NMS plan; and 

(iii) is an automated quotation that is the best bid or best offer of a national securities exchange, or the best 

bid or best offer of a national securities association. 



58 

 

FINRA, and must be disseminated in consolidated market data.142 Accordingly, Rule 611 

provides for intermarket price protection only of an exchange’s or FINRA’s best bid and offer 

(“BBO”). It does not establish time priority among the same-priced quotations at different 

trading centers, nor does it protect “depth-of-book” quotations (quotations with prices outside an 

exchange’s or FINRA’s BBO) or odd lot quotations (quotations with sizes of less than one round 

lot). 

In adopting Rule 611, the Commission stated that strong intermarket price protection 

offers greater assurance, on an order-by-order basis, to investors who submit market orders that 

their orders in fact will be executed at the best readily available prices, which can be difficult for 

investors, particularly individual investors, to monitor.143 One of the Commission’s concerns 

when adopting Rule 611 was the internalization of individual investor orders by broker-dealers. 

The Commission observed that the great majority of internalized trades are the small trades of 

individual investors, and that, in 2003, nearly 1 out of every 30 of these trades, of which there are 

millions, appears to have been executed at a price inferior to an automated and accessible 

quotation.144 The Commission stated that Nasdaq’s data submitted in response to the Rule 611 

proposal appeared to indicate a need for regulatory action to reinforce the fundamental principle 

of best price for all NMS stocks.145 

                                                
142  Rule 600(b)(71) defines “protected quotation” as a protected bid or a protected offer. As stated in section 

II.B.1 above, no FINRA member currently uses the ADF, its facility for displaying quotations, to 

disseminate quotations in consolidated market data. Today, only exchanges display protected quotations 

under Rule 611. 

143  Regulation NMS Adopting Release, supra note 78, 70 FR at 37505. 

144  Id. at 37508. 

145  Id. In response to the Commission’s proposal to adopt Regulation NMS, The Nasdaq Stock Market, Inc. 

(n.k.a. Nasdaq) submitted data to show that the trade-through rates for Nasdaq stocks in some trading 

centers had dropped from the Fall of 2003 to the Fall of 2004, and that the reduction during that time was a 
result of fewer independently operating ECNs. The Commission stated “[i]t is unlikely that ECN 



59 

 

 

Also in 2005, the Commission adopted the Sub-Penny Rule as Rule 612 of Regulation 

NMS to establish a minimum pricing increment for NMS stocks. Specifically, paragraph (a) of 

Rule 612 provides that no national securities exchange, national securities association, ATS, 

vendor, or broker or dealer shall display, rank, or accept from any person a bid or offer, an order, 

or an indication of interest in any NMS stock priced in an increment smaller than $0.01 if that 

bid or offer, order, or indication of interest is priced equal to or greater than $1.00 per share.146 

Rule 612 does not, however, prohibit a sub-penny trade by a wholesaler or other internalizing 

broker-dealer, as long as the trade did not result from an impermissible sub-penny quotation, 

order, or indication of interest.147 For example, Rule 612 does not prevent wholesalers, after they 

receive an order from a broker, from choosing to execute that order in a transaction at a sub-

penny price. This includes a trade executed at a price that is a sub-penny increment better than 

the best displayed quotation in consolidated market data.148 This sub-penny trading exception is 

not available to market participants on exchanges and ATSs,149 in contrast, because those trading 

centers operate by accepting, matching, and executing orders from market participants. 

Exchanges and ATSs, with limited exceptions, may only execute orders at a sub-penny price if 

                                                
consolidation could have caused such a major reduction in trade-through rates at securities dealers when 

they execute their customer orders internally.” Id. (footnote omitted). 

146  17 CFR 242.612(a). Paragraph (b) of Rule 612 sets forth a minimum increment of $0.0001 for prices less 

than $1.00 per share. 

147  The Commission also is proposing to amend Rule 612 regarding sub-penny trading. See Minimum Pricing 

Increments Proposal, supra note 98. The Commission encourages commenters to review that proposal to 

determine whether it might affect their comments on this proposing release. 

148  Regulation NMS Adopting Release, supra note 78, 70 FR at 37556 (the Commission stated that sub-penny 

executions due to price improvement are generally beneficial to retail investors). 

149  The regulatory framework for ATSs is discussed in section III.B.3 below. 



60 

 

the price is the NBBO midpoint.150 Also, exchanges with retail liquidity programs (“RLPs”) have 

been granted an exemption from Rule 612 to provide executions in tenths of a penny.151 The 

Commission has granted exemptions for these programs to promote competition between 

exchanges and OTC market makers (which, as discussed above, includes wholesalers).152 As 

                                                
150  Neither Rule 612 nor any other Commission rule or interpretation states that exchanges and ATSs may 

execute midpoint orders at a sub-penny amount (e.g., if the NBBO is 10.00-10.01 to execute at the mid-

point price of 10.005). However, the Commission has stated that Rule 612 will not prohibit a sub-penny 

execution resulting from a midpoint or volume-weighted algorithm or from price improvement, so long as 

the execution did not result from an impermissible sub-penny order or quotation. Regulation NMS 

Adopting Release, supra note 78, 70 FR at 37556. Undisplayed “floating” midpoint orders (i.e., orders that 

re-price when the exchange BBO changes), for example, are permissible under Rule 612, and the 

Commission has approved numerous rule proposals by national securities exchanges for their use. See, e.g., 

Securities Exchange Act Release Nos. 89563 (Aug. 14, 2020), 85 FR 51510 (Aug. 20, 2020) (SR-PEARL-

2020-03) (order approving proposed rule change by MIAX PEARL to establish rules governing the trading 
of equity securities, including a midpoint peg order type); and 78101 (June 17, 2016), 81 FR 41142 (June 

23, 2016) (File No. 10-222) (order approving IEX’s registration as a national securities exchange, including 

the exchange’s inclusion of a midpoint pegged order type in its rulebook).  

151  Several exchanges operate RLPs. These are programs for retail orders seeking liquidity that allow market 

participants to supply liquidity to such retail orders by submitting undisplayed orders priced at least $0.001 

better than the exchange’s protected best bid or offer. Each program results from a Commission approval of 

a proposed rule change made on Form 19b-4 combined with a conditional exemption, pursuant to section 

36 of the Exchange Act, from Rule 612 to enable the exchange to accept and rank (but not display) the sub-

penny orders. See, e.g., Securities Exchange Act Release Nos. 85160 (Feb. 15, 2019), 84 FR 5754 (Feb. 22, 

2019) (SR-NYSE-2018-28) (approving the NYSE RLP on a permanent basis and granting the exchange a 

limited exemption from the Sub-Penny Rule to operate the program); 86194 (June 25, 2019), 84 FR 31385 

(July 1, 2019) (SR-BX-2019-011) (approving Nasdaq BX’s retail price improvement program on a 
permanent basis and granting the exchange a limited exemption from the Sub-Penny Rule to operate the 

program). 

152  Id. See also Securities Exchange Act Release No. 73702 (Nov. 28, 2014), 79 FR 72049 (Dec. 4, 2014) (SR-

BX-2014-048) (approving Nasdaq BX’s (f/k/a NASDAQ OMX BX Inc.) establishment of its retail price 

improvement program on a pilot basis). In granting the original exemption from Rule 612, the Commission 

stated that the vast majority of “marketable retail orders” are internalized by OTC market makers, and that 

retail investors can benefit from such arrangements to the extent that OTC market makers offer them price 

improvement over the NBBO. This price improvement is typically offered in sub-penny amounts. The 

Commission explained that OTC market makers typically select a sub-penny price for a trade without 

quoting at that exact amount or accepting orders from retail customers seeking that exact price; and that 

exchanges—and exchange member firms that submit orders and quotations to exchanges—cannot compete 
for “marketable retail order flow” on the same basis, because it would be impractical for exchange 

electronic systems to generate sub-penny executions without exchange liquidity providers or retail 

brokerage firms having first submitted sub-penny orders or quotations, which the Sub-Penny Rule 

expressly prohibits. The Commission explained that the limited exemption granted to operate the retail 

price improvement program should promote competition between exchanges and OTC market makers in a 

manner reasonably designed to minimize the problems that the Commission identified when adopting the 

Sub-Penny Rule. Id. at 72053.61 

 

discussed in section VII below, however, the great majority of marketable orders of individual 

investors continue to be routed first to wholesalers. 

 

As stated above, access to trading centers and their services is a critically important 

component of the NMS as a means to link trading centers together in a unified system. For 

example, the Regulation NMS rules addressing the display of quotations, the display of customer 

limit orders, and protection of customer orders cannot achieve their objectives if market 

participants do not have fair and efficient means to access those trading centers that display 

quotations and execute orders.153  

For purposes of assessing access requirements in today’s NMS, trading centers for NMS 

stocks can be divided into three distinct regulatory categories: national securities exchanges, 

NMS Stock ATSs, and internalizing broker-dealers (including wholesalers). As discussed below, 

the statutory access requirements and the Commission’s access rules currently apply to 

exchanges and ATSs, as well as to FINRA members that display quotations in consolidated 

market data through FINRA’s ADF (of which there currently are none). In contrast, broker-

dealers that do not display quotations in consolidated market data and that trade outside of an 

ATS, such as wholesalers, are not subject to any fair access requirements under the Exchange 

Act or Commission rules. While subject to Commission and SRO rules for broker-dealers, 

internalizing broker-dealers are not prohibited from restricting access to their trading 

mechanisms and the investor orders that they internalize. An internalizing broker-dealer is not 

required, for example, to provide other market participants, including institutional investors and 

                                                
153  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37538. The rules discussed in this section 

address requirements that apply to trading centers providing access to their services. Exchange Act Rule 

15c3-5, in contrast, addresses access, but in the context of risk management controls for broker-dealers 

with market access. 



62 

 

liquidity providers on exchanges, with any opportunity to compete to provide the best prices to 

the individual investor orders that the broker-dealer executes internally. 

 

As stated in section III.A above, the Exchange Act directly requires national securities 

exchanges to provide fair access in four contexts.154 Section 6(b)(2) specifies that exchange rules 

must allow “any” broker-dealer registered with the Commission, unless subject to a specified 

disqualification, to become a member of the exchange. Section 6(b)(4) requires that exchange 

rules provide for the “equitable” allocation of “reasonable” dues, fees, and other charges among 

members, issuers, and other persons using exchange facilities. Section 6(b)(5) broadly requires 

that exchange rules be designed, among other things, to remove impediments to and perfect the 

mechanism of a free and open market and an NMS, and that exchange rules are not designed to 

permit unfair discrimination between customers, issuers, brokers, or dealers. And section 6(b)(8) 

requires that exchange rules do not impose any burden on competition not necessary or 

appropriate in furtherance of the purposes of the Exchange Act. 

In addition to these broad statutory requirements for all national securities exchanges, the 

Commission has adopted 17 CFR 242.610 (“Rule 610”) of Regulation NMS, which addresses 

access to displayed quotations. Specifically, Rule 610(a) prohibits any national securities 

exchange that operates an SRO trading facility155 from imposing unfairly discriminatory terms 

that would prevent or inhibit any person from obtaining efficient access through a member of the 

national securities exchange to the quotations in an NMS stock displayed through its SRO 

                                                
154  See supra notes 61-66 and accompanying text. 

155  Rule 600(b)(89) defines an “SRO trading facility” as a facility operated by or on behalf of a national 

securities exchange or a national securities association that executes orders in a security or presents orders 

to members for execution. 



63 

 

trading facility. This provision is designed to prohibit national securities exchanges from limiting 

“piggyback access” as a means by which non-members obtain access to exchange quotations 

through the services of an exchange member.156 Piggyback access, for example, allows non-

members to obtain access to a national securities exchange’s quotations without the need to 

obtain (and pay for) direct connectivity to the exchange. 

 

In 1998, the Commission initiated a new regulatory regime for ATSs with the adoption of 

Regulation ATS.157 An ATS is a trading system that falls within the definition of exchange in 

Section 3(b)(1) of the Exchange Act, but is exempted from such definition by Rule 3a1-1 under 

the Exchange Act if the trading system complies with Regulation ATS.158 For an NMS Stock 

ATS,159 Regulation ATS requires, among other things, that the NMS Stock ATS must register 

with the Commission as a broker-dealer and must file a Form ATS-N, a publicly available 

document that includes detailed disclosures about the NMS Stock ATS’s operations. 

In addition, Regulation ATS includes two separate types of access requirements that 

potentially can apply to an NMS Stock ATS. First, Rule 301(b)(3) imposes order display and 

execution access requirements on an NMS Stock ATS that displays orders to any person and had 

5% or more of average daily volume reported in an NMS stock during four of the preceding six 

calendar months. Similar to Rule 610, the “execution access” requirement of Rule 301(b)(3) is 

                                                
156  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37539. Rule 610(c) also limits the fees that 

can be charged for accessing an exchange’s best-priced displayed quotations, and Rule 610(d) addresses 

locking and crossing quotations. 

157  See Regulation ATS Adopting Release, 63 FR 70844, supra note 27. “Regulation ATS” consists of 17 CFR 

242.300 through 242.304 (“Rule 300” through “Rule 304” under the Exchange Act). 

158  17 CFR 240.3a1-1.  

159  In 2018, the Commission amended Regulation ATS with respect to the requirements that apply to NMS 

Stock ATSs. Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018) 

(“ATS-N Adopting Release”).  



64 

 

limited to access to displayed quotations in consolidated market data. As stated above in section 

III.B.1, FINRA’s ADF is a facility for broker-dealers (including ATSs) to display quotations in 

consolidated market data. Currently, no NMS Stock ATS that displays quotations uses the ADF 

to display its quotations in consolidated market data, and no NMS Stock ATS is subject to the 

execution access requirement of Rule 301(b)(3). 

Second, Rule 301(b)(5) imposes “fair access” requirements with respect to an NMS stock 

in which the NMS Stock ATS had 5% or more of the average daily volume reported during four 

of the preceding six calendar months. This fair access requirement requires an NMS Stock ATS 

(1) to establish written standards for granting access to trading on its systems, (2) to not 

unreasonably prohibit or limit any person in respect to access to services offered by such ATS by 

applying the written access standards in an unfair or discriminatory manner, (3) to maintain 

records of grants, denials, and limitations of access, and (4) to report the information required by 

Form ATS-R on grants, denials, and limitations of access. When it adopted Regulation ATS, the 

Commission emphasized that the fair access requirements of Rule 301(b)(5) apply to a far 

broader range of services than the “execution access” requirements of Rule 301(b)(3), which are 

limited to access to quotations. Specifically, the Commission stated that although it was adopting 

rules to require ATSs with significant trading volume to publicly display their best bid and offer 

and provide equal access to those orders, direct participation in ATSs offers benefits in addition 

to execution against the best bid and offer. The Commission gave as an example that direct 

participants could enter limit orders into the system, rather than just execute against existing 

orders on a fill-or-kill basis,160 and that direct participants could view all orders, not just the best 

bid or offer, which provides important information about the depth of interest in a particular 

                                                
160  A fill-or-kill order is an order with instructions to cancel the order if it cannot be executed in its full size. 



65 

 

security. The Commission further observed that some ATSs also allowed direct participants to 

enter “reserve” orders which hide the full size of an order from view. Because of these 

advantages to direct participants in an ATS, access to the best bid and offer through an SRO 

provided an incomplete substitute. Therefore, the Commission adopted rules to require most 

ATSs that have a significant percentage of overall trading volume in a particular security to 

comply with fair access standards.161 

In sum, the fair access requirements of Rule 301(b)(5) encompass all of the trading 

services of an NMS Stock ATS. When adopting these requirements, the Commission emphasized 

that an “alternative trading system must apply [fair access] standards fairly and is prohibited 

from unreasonably prohibiting or limiting any person with respect to trading in any equity 

securities.”162  

Currently, only a single NMS Stock ATS discloses on its Form ATS-N that it is subject 

to these fair access requirements for securities that are available for trading on its platform.163 

NMS Stock ATSs that are not subject to fair access requirements are not prohibited from unfairly 

discriminating with respect to the trading services they offer broker-dealers and other market 

participants. 

 

As stated in section III.B.2 above, Rule 611 protects the best-priced displayed quotations 

of FINRA members that use the ADF to display quotations in consolidated market data (though 

no FINRA member currently uses the ADF to do so). In adopting Rule 611, the Commission 

                                                
161  Regulation ATS Adopting Release, supra note 27, 63 FR at 70872 (footnote omitted). 

162  See id. at 70873.  

163  See supra note 29 and accompanying text. 

file://///ad.sec.gov/users/mr/doddj/OCR/supra


66 

 

recognized that assuring fair and efficient access to FINRA members displaying quotations in the 

ADF would be essential, given that other market participants were required by rule to not trade 

through such quotations.164 The ADF falls within the definition of an “SRO display-only facility” 

in Rule 600(b)(88) because it merely displays the quotations of its participants and neither 

executes orders itself nor presents orders to ADF participants for execution. Instead, market 

participants must obtain their own means of access to ADF participants to trade with ADF 

protected quotations. Accordingly, the Commission adopted Rule 610(b) to promote such access 

to ADF participants.165 Rule 610(b)(2) imposes the same piggyback access requirement that 

applies to exchanges under Rule 610(a), thereby assuring that market participants can obtain 

indirect access to an ATS’s or broker-dealer’s quotations in the ADF.  

In addition, however, Rule 610(b)(1) imposes an access requirement that is particularly 

tailored to address concerns presented by FINRA members (including NMS Stock ATSs) 

displaying quotations in the ADF. Specifically, Rule 610(b)(1) requires that any trading center 

that displays quotations in NMS stocks through an SRO display-only facility must provide a 

level and cost of access to such quotations that is substantially equivalent to the level and cost of 

access to quotations displayed by SRO trading facilities (such as national securities exchanges). 

The Commission emphasized that the phrase “level and cost of access” would encompass both 

(1) the policies, procedures, and standards that govern access to quotations of the trading center, 

and (2) the connectivity through which market participants can obtain access and the cost of such 

                                                
164  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37540 (discussing Rule 610, which 

addresses means of access to quotations). The Regulation NMS Adopting Release refers to National 

Association of Securities Dealers (“NASD”) members. NASD was the predecessor association to what 

today is FINRA. 

165  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37502-03; see also id. at 37539-43. 



67 

 

connectivity.166 The Commission further stated that trading centers that choose to display 

quotations in an SRO display-only facility would be required to bear the responsibility of 

establishing the necessary connections to afford fair and efficient access to their quotations, and 

the nature and cost of these connections for market participants seeking to access the trading 

center’s quotations would need to be substantially equivalent to the nature and cost of 

connections to SRO trading facilities.167 

In addition to these heightened access requirements for FINRA members (including NMS 

Stock ATSs) that display quotations in the ADF, the Commission stated that FINRA, as the self-

regulatory authority responsible for enforcing compliance by ADF participants with the 

requirements of the Exchange Act, would need to evaluate the connectivity of ADF participants 

to determine whether they meet the requirements of Rule 610(b)(1).168 The Commission also 

stated that the addition of a new ADF participant would constitute a material aspect of the 

operation of FINRA’s facilities, and thus require the filing of a proposed rule change pursuant to 

section 19(b) of the Exchange Act that would offer an opportunity for public notice and 

comment.169 

 

Rule 606 of Regulation NMS requires broker-dealers to publish quarterly reports on their 

routing of customer orders in NMS stocks, and Rule 605 of Regulation NMS requires market 

centers to make data files publicly available on a monthly basis that include a variety of statistics 

                                                
166  Regulation NMS Adopting Release, supra note 78, 70 FR at 37549. 

167  Id. 

168  Id. 

169  Id. 



68 

 

on their execution of orders in NMS stocks.170 When it originally adopted the two rules in 2000, 

the Commission stated that, by increasing the visibility of order execution and routing practices, 

the rules were “intended to empower market forces with the means to achieve a more 

competitive and efficient [NMS] for public investors.”171 

Rule 606 requires broker-dealers to disclose, among other things, the percentage of non-

directed customer orders routed to different trading centers, as well as the financial inducements 

offered by these trading centers to attract order flow.172 Information must be provided for four 

types of orders — market orders, marketable limit orders, non-marketable limit orders, and other 

orders. The enhanced disclosures include a requirement to disclose net aggregate amounts of 

PFOF received from trading centers or amounts paid to them (such as transaction fees on 

exchanges), both as a total dollar amount and an amount per 100 shares. 

Rule 605 requires market centers to disclose standardized statistics about the execution 

quality they achieve for “covered orders,” as defined in Rule 600(b)(22) of Regulation NMS.173 

In general, the definition of covered orders excludes order types for which the customer requests 

                                                
170  The rules that the Commission originally adopted were designated as Rule 11Ac1-6 and Rule 11Ac1-5. The 

Commission re-designated Rule 11Ac1-6 as Rule 606 and Rule 11Ac1-5 as Rule 605 when it adopted 

Regulation NMS in 2005. Regulation NMS Adopting Release, supra note 78, 70 FR at 37538. The term 

“market center,” as defined in Rule 600(b)(46) of Regulation NMS, is somewhat narrower than trading 

center. Market centers include, for example, national securities exchanges, ATSs, and OTC market makers 

(including wholesalers), but do not include the broad catch-all category of trading center that encompasses 

any broker-dealer that executes orders internally as principal or agent. 

171  Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75427 (Dec. 1, 2000). The 

Commission enhanced the order routing disclosure requirements of Rule 606 when it amended the rule in 

2018. Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018). 

172  A “non-directed order” is defined in Rule 600(b)(56) of Regulation NMS to mean any order from a 

customer other than a directed order, and a “directed order” is defined in Rule 600(b)(27) of Regulation 

NMS to mean an order from a customer that the customer specifically instructed the broker-dealer to route 

to a particular venue for execution. 

173  Rule 605(a)(1). The Commission also is proposing to amend the order execution quality disclosures 

required by Rule 605. See Securities Exchange Act Release No. 96493 (Dec. 14, 2022) (File No. S7-29-22)  

(Disclosure of Order Execution Information). The Commission encourages commenters to review that 

proposal to determine whether it might affect their comments on this proposing release. 



69 

 

special handling that could detract from the goal of achieving comparable statistics for similar 

order types across different market centers. Unlike the Rule 606 disclosures, the Rule 605 data 

files are not designed to be human-readable and instead consist of a large volume of detailed 

statistics for each of the NMS stocks in which a market center receives covered orders. The data 

files are published in a format that is designed to be downloaded and processed with analysis 

software, such as a spreadsheet program, which then can be used to generate summary reports 

for viewing. 

IV. Description of Proposed Rule 615 

A. Overview of Order Competition Requirement 

Paragraph (a) of Proposed Rule 615 sets forth the rule’s core competition requirement. It 

states that a restricted competition trading center shall not execute a segmented order 

internally174 until after a broker-dealer has exposed such order to competition at a specified limit 

price in a qualified auction operated by an open competition trading center. As discussed below 

in this section IV: (1) segmented order, open competition trading center, restricted competition 

trading center, and qualified auction are new terms proposed to be defined in Rule 600(b) of 

Regulation NMS; (2) certain exceptions to the order competition requirement are set forth in 

paragraph (b) of Proposed Rule 615; (3) the requirements for a qualified auction are specified in 

paragraph (c) of Proposed Rule 615; and (4) the requirements with respect to segmented orders 

that would be imposed on open competition trading centers, originating brokers, all broker-

                                                
174  The applicability of paragraph (a) of Proposed Rule 615 to “internally” executed transactions is designed to 

accommodate the practice of some trading centers that both execute orders internally and obtain executions 

of orders externally by seeking liquidity at other trading centers. Cf. Rule 600(b)(95) of Regulation NMS 
(definition of “trading center” includes “any other broker or dealer that executes orders internally by 

trading as principal or crossing orders as agent”).  



70 

 

dealers, and national securities exchanges are set forth in paragraphs (d) through (g) of Proposed 

Rule 615. 

The term “segmented order,” as proposed to be defined in Proposed Rule 600(b)(91) of 

Regulation NMS, is a key term determining the scope of Proposed Rule 615 and is designed to 

encompass those orders of individual investors with relatively low adverse selection costs.175 In 

addition, paragraphs (b)(2) and (b)(3) of Proposed Rule 615 would provide exceptions for larger 

orders ($200,000 or more) and orders that are executed at favorable prices for individual 

investors (orders executed at the NBBO midpoint or better); paragraph (b)(4) would provide an 

exception for limit orders that have a limit price that is equal to or more favorable for the 

segmented order than the NBBO midpoint (i.e., non-marketable segmented orders with a limit 

price that is equal to or lower than the midpoint for buy orders and equal to or higher than the 

NBBO midpoint for sell orders); and paragraph (b)(5) would provide an exception for orders 

sized less than one share and for the fractional component, if any, of a segmented order if no 

qualified auction is available to execute the fractional share or fractional component.176  

The purpose of the order competition requirement is to expose segmented orders to 

competition to provide the best prices on an order-by-order basis and thereby minimize the 

                                                
175  As discussed in IV.B.1 below, the proposed definition of “segmented order” would exclude very active 

traders whose orders are likely to impose a much higher level of adverse selection costs on liquidity 

providers than the less-active accounts that are more typical of individual investors. This is done by 

limiting the proposed definition of “segmented orders” to orders for accounts in which the average daily 

number of trades executed in NMS stocks was less than 40 in each of the six preceding calendar months.  

176  As discussed in section IV.B.1 below, the proposed definition of “segmented order” does not include a 

limit price component. Compliance with the order competition requirement for limit orders would vary 

depending on the relation of any limit price and an execution price to the NBBO. For example, segmented 

orders that have a limit price, or are executed at a price, equal to or more favorable for the segmented order 
than the NBBO midpoint or better, would have an exception under paragraph (b)(3) or (b)(4) of Proposed 

Rule 615(b). Segmented orders with a limit price beyond the NBBO midpoint (higher for segmented orders 

to buy and lower for segmented orders to sell) could still qualify for the exception in Proposed Rule 

615(b)(3) if they were executed at the NBBO midpoint or better (i.e., such an order would have been 

executed at a more favorable price for the segmented order than its limit price). 



71 

 

transaction costs incurred by individual investors when they use marketable orders. Proposed 

Rule 615 would allow flexibility for broker-dealers, wholesalers, and other restricted competition 

trading centers in how they comply with the rule. A broker-dealer could choose, subject to its 

best execution responsibilities as discussed further below, to route a segmented order directly to 

a qualified auction, to an open competition trading center, or to a national securities exchange. 

Alternatively, a broker-dealer could route such segmented order to another destination, such as a 

routing broker-dealer, a wholesaler, or other restricted competition trading center, which, in turn, 

could route the segmented order to a qualified auction, to an open competition trading center, or 

to a national securities exchange.  

For illustrative purposes, the following is one example of how a segmented order could 

be handled and executed in compliance with Proposed Rule 615. Assume that a broker-dealer 

routed a customer’s segmented order to a wholesaler. The wholesaler that received the 

segmented order could select a price at which it was willing to execute a segmented order 

internally. Before executing internally, however, the wholesaler would be required to submit the 

segmented order to a qualified auction with a specified limit price. As discussed further below, 

the specified limit price is not a price at which the wholesaler is guaranteeing to execute (i.e., it 

is not a “reserve” price or a “backstop” of the segmented order).177 Rather, the specified limit 

price would inform auction responders on how to price their orders and also, if the segmented 

order did not receive an execution in the qualified auction, would be the price (or better) at which 

the wholesaler or other restricted competition trading center subsequently could execute the 

segmented order as soon as reasonably possible. 

                                                
177  If the segmented order is not executed in the qualified auction, however, the wholesaler could choose to 

execute the segmented order internally at the specified limit price or better. 



72 

 

The wholesaler that submitted the segmented order to a qualified auction would have a 

choice of whether to participate in the qualified auction by submitting its own auction response. 

The wholesaler could, for example, use its selected price for execution of the segmented order as 

the specified limit price in the qualified auction or, alternatively, the wholesaler could pick a less 

aggressive price as the specified limit price for the qualified auction and participate in the 

qualified auction by submitting an auction response with its more aggressive selected price. The 

open competition trading center operating the qualified auction would widely disseminate an 

auction message, which would include the specified limit price, in consolidated market data that 

would invite auction responses. During the qualified auction, the full range of market 

participants with the technological capability of responding to a fast (sub-second) auction, such 

as exchange market makers and institutional investors through their broker-dealers’ smart order 

routers (“SORs”), would have an opportunity to compete to provide the best price for the 

segmented order by submitting auction responses. If all or part of the segmented order could be 

executed in the qualified auction at the specified limit price or better, the open competition 

trading center operating the qualified auction would execute the segmented order pursuant to the 

execution priority rules set by the open competition trading center running the qualified auction, 

consistent with the execution priority requirements of Proposed Rule 615(c)(5). If the segmented 

order did not receive a full execution in the qualified auction, the unexecuted order, or 

unexecuted portion thereof, would be canceled back to the wholesaler, who could, as soon as 

reasonably possible, execute the segmented order, or unexecuted portion thereof, internally at a 

price that was equal to or better for the segmented order than the specified limit price. As 

discussed below, the wholesaler would not, however, be required to execute the unexecuted 

segmented order or unexecuted portion of the segmented order at the specified limit price. Any 



73 

 

unexecuted segmented order, or any unexecuted portion thereof, would continue to be subject to 

the order competition requirements of Proposed Rule 615(a).  

Given the absence of a “reserve price” or “backstop” requirement, a segmented order 

would not have certainty of an execution in a qualified auction at a price equal to the NBBO or 

better, but the marketable orders of individual investors orders today also do not have certainty 

of execution for orders routed to wholesalers. As shown in Table 7 in section VII.B.4 below, 

1.67% of marketable order shares in NMS stocks (and 3.61% of marketable order shares in non-

S&P 500 stocks) receive executions at prices that are outside the NBBO at the time the 

wholesaler received the order. This low percentage of orders executed outside the NBBO when 

routed to wholesalers is consistent with the low probability that the NBBO will move away from 

individual investor orders in the very short time period of a qualified auction.178 For the reasons 

discussed in section VII.C.2.b.i below, the Commission does not believe that segmented orders 

would have significantly greater risk of inferior execution prices under Proposed Rule 615 than 

currently provided by wholesalers, but the variability of execution prices could increase.  

In sum, Proposed Rule 615 would allow segmented orders to continue to be executed 

internally by a wholesaler or other restricted competition trading center, but not until after the 

execution price had been exposed to order-by-order competition in a fair and open qualified 

auction. In addition, qualified auctions would give the trading interest of other investors, 

particularly institutional investors, an opportunity to interact directly (without the participation of 

a dealer) with, and thus execute against, the marketable orders of individual investors. When 

investor orders are able to interact directly at a fully competitive price without the intermediation 

                                                
178  See infra section VII.C.2.b.i (the fade probability of the NBBO prices goes from an average of 1.8% at 25 

milliseconds after an internalized individual investor order, to 2.8% at 100 milliseconds, and to 4.6% at 300 

milliseconds). 



74 

 

of a wholesaler or other dealer, two investors (both the buyer and the seller) are able to benefit 

mutually from a single trade, thereby promoting the NMS objective that, consistent with the 

objectives of economically efficient execution of securities transactions and the practicability of 

brokers executing investors’ orders in the best market, investors’ orders have an opportunity to 

be executed without the participation of a dealer.179 

Proposed Rule 615 does not limit the types of broker-dealers that would be permitted to 

submit segmented orders for execution in a qualified auction. For example, a retail broker that 

currently routes segmented orders directly to a wholesaler could instead route such orders 

directly to a qualified auction with a specified limit price selected by the retail broker. Such 

specified limit price would need to be consistent with its best execution responsibilities and the 

terms of the order as set by the customer. If the segmented order did not receive an execution in 

the auction at the specified limit price, the retail broker could, as soon as reasonably possible, 

route the segmented order to a wholesaler with a representation that the segmented order had 

cleared (i.e., not received an execution in) a qualified auction at that price. The wholesaler then 

could, in compliance with Proposed Rule 615, as soon as reasonably possible, execute the 

segmented order internally at the specified limit price or better. 

If a segmented order did not receive an execution in a qualified auction (regardless of 

whether submitted to the auction by a retail broker, a wholesaler, or other broker-dealer), a 

wholesaler that received such order following the conclusion of a qualified auction would not be 

required by Proposed Rule 615 to execute the order internally. If a wholesaler chose not to 

execute the order internally following the conclusion of a qualified auction, the segmented order, 

as with all segmented orders, would need to be further handled in compliance with Proposed 

                                                
179  See Section 11A(a)(1)(C)(v) of the Exchange Act. 



75 

 

Rule 615. For example, (1) the wholesaler could return the order to the retail broker or other 

broker-dealer for further handling (such as resubmission to a qualified auction with a revised 

specified limit price); (2) the wholesaler itself could resubmit the segmented order to a qualified 

auction with a revised specified limit price;180 or (3) the wholesaler could route the order directly 

to an open competition trading center or national securities exchange (as national securities 

exchanges are not restricted competition trading centers subject to Proposed Rule 615(a)) for an 

immediate execution on its continuous order book. The decision on how to handle segmented 

orders that clear qualified auctions without executions also would be governed by the relevant 

best execution responsibilities of retail brokers and wholesalers. 

As indicated in the above example and subject to relevant best execution responsibilities, 

a broker-dealer responsible for obtaining the execution of a segmented order has the option of 

routing the order directly to the continuous order book181 of an open competition trading center 

or national securities exchange for execution, without exposure in a qualified auction. The 

definition of restricted competition trading center would exclude all open competition trading 

centers and all national securities exchanges.182 They would be excluded because both of these 

types of trading centers either are not permitted by the Exchange Act currently, or would not be 

permitted by Proposed Rule 615, to unfairly restrict access to their continuous order books.183 

                                                
180  The revised specified limit price set by the wholesaler would have to be consistent with the terms of the 

order, such as the limit price set by the customer, if any, as well as with the wholesaler’s best execution 

responsibilities.  

181  See infra section IV.B.2 (discussing the proposed definition of “continuous order book”). 

182  See Proposed Rule 600(b)(87) and discussion in section IV.B.3 below. 

183  Section III.B.2 above discusses the Exchange Act provisions that currently prohibit a national securities 

exchange from unfairly restricting access. Section IV.B.2 below discusses the proposed access requirement 

for any open competition trading center that is not a national securities exchange (i.e., an NMS Stock ATS). 

In many cases, an open competition trading center also would be a national securities exchange. As 



76 

 

Consequently, segmented orders routed directly to the continuous order books of open 

competition trading centers and national securities exchanges would be subject to competition to 

provide the best prices on an order-by-order basis, and thus would not be isolated.184  

Importantly, however, all relevant broker-dealer best execution responsibilities would 

govern the extent to which segmented orders could be routed to an open competition trading 

center or national securities exchange without first clearing a qualified auction. As discussed in 

section III.B.2 above, best execution generally requires a broker-dealer to obtain the best terms 

reasonably available for customer orders. Because liquidity providers can profitably offer better 

prices to segmented orders of individual investors with low adverse selection costs as compared 

to the prices they can offer other types of order flow, trading mechanisms that offer such 

segmentation, as would a qualified auction, are quite likely to obtain better prices for segmented 

orders than other trading mechanisms, such as the continuous order book of an open competition 

trading center or national securities exchange, that commingle all types of order flow.185 A 

broker-dealer would need to consider the opportunity for better prices in its best execution 

analysis. 

There may be market conditions when a best execution analysis could indicate that a 

broker-dealer should route segmented orders directly to the continuous order book of an open 

competition trading center or national securities exchange. One example could be a “fast market” 

                                                
discussed in section IV.B.2 below, however, some national securities exchanges would not meet the 

definition of an open competition trading center. 

184  As discussed in sections IV.D and IV.G below, open competition trading centers and national securities 

exchanges would not be allowed to operate a mechanism limited, in whole or in part, to segmented orders, 

including RLPs, barring an exception from Proposed Rule 615. See infra notes 258, 259 and accompanying 

text.  

185  See, e.g., infra section VII.C.1.b (discussing anticipated benefits of improved execution quality for retail 

orders exposed in qualified auctions). 



77 

 

– when publicly quoted prices are moving rapidly away when a broker-dealer receives a 

marketable order (that is, rapidly up in price for orders to buy or rapidly down in price for orders 

to sell). In these market conditions, the broker-dealer could determine that best prices could be 

obtained by immediately attempting to execute segmented orders against the NBBO on an open 

competition trading center or national securities exchange, rather than first submitting segmented 

orders to qualified auctions when market conditions suggest that auction would be unlikely to 

generate better prices than the NBBO. Proposed Rule 615 is designed to give broker-dealers 

sufficient flexibility to obtain best execution of individual investor orders in the full range of 

market conditions. 

B. Coverage of Proposed Rule 615 

 

The term “segmented order,” as proposed to be defined in Proposed Rule 600(b)(91)186 of 

Regulation NMS, would have two parts. First, the order for an NMS stock must be for an 

account of a natural person, or an account held in legal form on behalf of a natural person or 

group of related family members. Second, for such an account, the average daily number of 

trades executed in NMS stocks must be less than 40 in each of the preceding six calendar 

months. The intent of the proposed definition is to encompass the marketable orders of 

individual investors with expected low adverse selection costs that retail brokers currently route 

to wholesalers for handling and execution. These orders already are segmented in practice.  

                                                
186  Rule 600(b) of Regulation NMS sets forth defined terms. Rule 600(b) would be amended to insert new 

defined terms used in Proposed Rule 615, and existing defined terms would be renumbered accordingly. 

Cross references to Rule 600(b) throughout the rules and regulations under the Exchange Act would also be 

amended to reflect the new numbering. 



78 

 

The proposed definition’s limitation to “natural persons” draws on the approach in 

existing rules designed to identify the orders of individual investors. For example, the definition 

of “retail customer” in the Commission’s Regulation Best Interest (“Regulation BI”) is limited to 

a “natural person.”187 Moreover, several national securities exchanges operate programs for 

trading “retail” orders that are limited to accounts of natural persons or certain accounts on 

behalf of natural persons.188 The proposed definition of segmented order is closely related to 

                                                
187  17 CFR 240.15l-1(b)(1) (defining “retail customer” as, among other things, as a natural person who 

receives a recommendation of any securities transaction from a broker-dealer and uses the recommendation 

primarily for personal, family, or household purposes). Proposed Rule 615 does not incorporate all of the 

definition of “retail customer” in Regulation BI, because that definition is limited to when there is a 

recommendation to a retail customer. Proposed Rule 615, in contrast, is designed to promote competition 

for individual investor orders, regardless of whether such investor is self-directed. Moreover, Proposed 

Rule 615 is focused on limiting the extent to which an account may generate orders with a high level of 

adverse selection costs. As discussed below, Proposed Rule 615 includes a trading activity threshold 

designed to address this policy concern. The definition of “retail investor” for purposes of 17 CFR 249.641 

(“Form CRS”) (Relationship Summary for Brokers and Dealers Providing Services to Retail Investors) is 
also limited to “natural persons” and defines “retail investor” as a natural person, or the legal representative 

of such natural person, who seeks to receive or receives services primarily for personal, family or 

household purposes. In the context of Form CRS, the term “retail investor” is used in connection with 

disclosures to prospective customers, and as in the context of Regulation BI, relates to the relationship 

between an investor and a financial professional. See Securities Exchange Act Release No. 86031 (June 5, 

2019), 84 FR 33318, 33345 (July 12, 2019) (adopting Regulation Best Interest: The Broker-Dealer 

Standard of Conduct) (”Regulation BI Adopting Release”). Because Proposed Rule 615 is intended to 

improve competition for individual investor orders, and is not related to the relationship between an 

investor and a financial professional, the Commission is not proposing to include the phrase “primarily for 

personal, family, or household purposes” in the definition of segmented order. For purposes of Proposed 

Rule 615, limiting segmented orders to orders for the accounts of natural persons, and specifically those 

with less than 40 trades in NMS stocks in each of the preceding 6 months, is intended to address adverse 
selection costs and is not related to the purposes for which a natural persons may be seeking the services of 

a broker-dealer. 

188  See supra note 151 (generally describing exchange RLPs). 



79 

 

these rules,189 as well as to FINRA’s fee schedule for Nasdaq’s Trade Repository Facility.190 

Patterning the definition of segmented order on existing SRO rules is designed to leverage 

market knowledge and to facilitate compliance with Proposed Rule 615. This would help reduce 

the costs of compliance because broker-dealers would already be familiar with identifying orders 

as for the accounts of natural persons, or for related accounts, in these other contexts. In addition 

to the accounts of natural persons themselves, the definition would, again consistent with SRO 

rules, cover accounts held in legal form on behalf of natural persons or groups of related family 

members.  

For purposes of the definition of “segmented order,” a “group of related family members” 

would be defined broadly to include a group of natural persons with any of the following 

relationships: child, stepchild, grandchild, great grandchild, parent, stepparent, grandparent, great 

grandparent, domestic partner, spouse, sibling, stepbrother, stepsister, niece, nephew, aunt, uncle, 

mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, 

including adoptive and foster relationships; and any other natural person (other than a tenant or 

employee) sharing a household with any of the foregoing natural persons.191 This definition is 

                                                
189  E.g., IEX Rule 11.190(b)(15) (providing, among other things, that “[a] Retail order must reflect trading 

interest of a natural person” and that “[a]n order from a retail customer can include orders submitted on 

behalf of accounts that are held in a corporate legal form—such as an Individual Retirement Account, 

Corporation, or a Limited Liability Company—that have been established for the benefit of an individual or 

group of related family members, provided that the order is submitted by an individual.”); and Nasdaq, 

Equity 7, section 118 (defining a “Designated Retail Order” as originating from a “natural person” and 

explaining that “[a]n order from a ‘natural person’ can include orders on behalf of accounts that are held in 

a corporate legal form—such as an Individual Retirement Account, Corporation, or a Limited Liability 

Company—that has been established for the benefit of an individual or group of related family members, 

provided that the order is submitted by an individual”). 

190  FINRA Rule 7620A (defining a “Retail Order” as originating from a “natural person” and explaining that 

“[a]n order from a ‘natural person’ can include orders on behalf of accounts that are held in a corporate 

legal form, such as an Individual Retirement Account, Corporation, or a Limited Liability Corporation that 

has been established for the benefit of an individual or group of related family members, provided that the 

order is submitted by an individual”). 

191  Proposed Rule 600(b)(91)(iii). 



80 

 

designed to be broad so as not to restrict the types of arrangements that may be set up to benefit 

family groups, including individual retirement accounts, corporations, and limited liability 

companies for the benefit of related family members.192  

The second part of the proposed definition of segmented orders focuses on the frequency 

of trading in an account. It would limit the average daily number of trades executed in NMS 

stocks in an account to less than 40 for each of the six preceding calendar months. This part of 

the proposed definition would exclude very active traders whose orders are likely to impose a 

much higher level of adverse selection costs on liquidity providers than the less-active accounts 

that are more typical of individual investors. For example, very active traders may use 

sophisticated trading tools, such as application programming interfaces (APIs) and computer 

algorithms, to submit their orders. These tools can enable highly active trading strategies that 

impose much higher adverse selection costs on liquidity providers than the manual placement of 

orders by a natural person. Rather than prohibiting any opportunity for investors to use 

potentially beneficial trading tools,193 however, the proposed definition specifies a maximum 

level of trading activity as a means to limit the level of adverse selection costs. 

The proposed level is supported by an analysis of the distribution of order activity across 

accounts reported to the Consolidated Audit Trail as being held for the benefit of an “Individual 

                                                
192  Given the proposed broad definition of “group of related family members” in Proposed Rule 600(b)(91), an 

account held in legal form on behalf of a group of related family members could include some accounts 

with an extensive portfolio of NMS stocks. The second prong of the definition of segmented order, 

however, would exclude accounts with average daily trades of 40 or more and likely would exclude many 

accounts with large portfolios. 

193  Some SRO rules, for example, prohibit the use of any computerized technology for submitting retail orders. 

See, e.g., NYSE Rule 7.44(a)(3) (defining “retail order” in the context of NYSE’s RLP to require that “the 

order does not originate from a trading algorithm or any other computerized methodology”).81 

 

Customer” for the first six months of 2022.194 Across this period, slightly more than 99.9% of 

Individual Customer accounts originated, on an average daily basis, 40 or fewer orders 

associated with a trade. The median number of daily-average orders associated with a trade from 

accounts at or below this threshold was less than one.195 The median number of daily-average 

orders associated with a trade from accounts above this threshold was approximately 68.196 

Accordingly, the threshold in the proposed rule is designed to capture the overwhelming majority 

of individual investor accounts that could benefit from strengthened competition for their orders, 

while excluding accounts that might impose a high level of adverse selection costs on liquidity 

providers. Including orders highly likely to impact short-term price changes in qualified auctions 

could detract from the quality of execution prices for segmented orders as a whole.197 

Specifically, including orders with high adverse selection costs in qualified auctions would 

                                                
194  Analysis of Consolidated Audit Trail data for all orders originated from an account marked as held for the 

benefit of an Individual Customer, Jan. 1, 2022, through June 30, 2022. This analysis counted any order 

associated with one or more trades or fills in an order lifecycle. For the Consolidated Audit Trail, account 

type definitions are available in Appendix G to the CAT Reporting Technical Specifications for Industry 

Members (https://catnmsplan.com), for the field name “accountHolderType.” Account types represent the 

beneficial owner of the account for which an order was received or originated, or to which the shares or 

contracts are allocated. Possible types are: Institutional Customer, Employee, Foreign, Individual 

Customer, Market Making, Firm Agency Average Price, Other Proprietary, and Error. An Institutional 

Customer account is defined by FINRA Rule 4512(c) as a bank, investment adviser, or any other person 

with total assets of at least $50 million. An Individual Customer account means an account that does not 
meet the definition of an “institution” and is also not a proprietary account. Therefore, the CAT account 

type “Individual Customer” includes natural persons as well as corporate entities that do not meet the 

definitions for other account types. 

195  Id.  

196  Id. 

197  In other contexts, national securities exchanges currently characterize certain types of orders according to 

the level of activity associated with a market participant’s account. With respect to trading in listed options, 

several exchanges include the concept of “Professional” order, and these orders, which must be identified 

as such, are distinguished from other customer orders. For example, pursuant to Cboe Exchange, Inc. 

(“CBOE”) Rule 1.1, “Professional” means any person or entity that is not a broker or dealer in securities 

and places more than 390 orders in listed options per day on average during a calendar month for its own 
beneficial account(s). Under CBOE’s rules, all Professional orders are distinguished from other public 

customer orders (i.e., orders for persons other than broker-dealers), must be marked as such, and are 

handled by CBOE’s trading platform in the same manner as broker-dealer orders unless otherwise 

specified. See CBOE Rule 1.1. See also NYSE Arca Rule 1.1; Nasdaq, Options 1, section 1(a)(47); and 

BOX Rule 100(a)(52). 

https://catnmsplan.com/


82 

 

increase the overall level of adverse selection costs of the order flow submitted to qualified 

auctions. Because auction responders could not know in advance whether any particular order 

was likely to impose high adverse selection costs, they would need to adjust the prices of all their 

auction responses to reflect the higher level of adverse selection costs of qualified auction order 

flow as a whole. 

The proposed definition of segmented order does not have a size limitation and therefore 

encompasses orders of all sizes, whether large or small. As discussed in section IV.B.5 below, 

however, the execution of large orders with sizes of $200,000 or more would be eligible for an 

exception from the order competition requirement of Proposed Rule 615(a). Such orders would, 

however, remain segmented orders and, if consistent with a broker-dealer’s best execution 

responsibilities, could be submitted for execution in a qualified auction. 

Orders with small sizes would also be included in the proposed definition of segmented 

orders and would be subject to the order competition requirement. These include both odd lot 

orders with a size of less than one round lot (generally less than 100 shares) and orders with a 

fractional share component (less than one share). As discussed further below, while orders for 

less than one share and orders for more than one share with a fractional share component would 

also fall within the proposed definition of a segmented order, Proposed Rule 615 would include 

an exception for orders for less than one share and for the fractional component of a segmented 

order, if there is no qualified auction available for such orders.198  

Finally, the proposed definition of a segmented order does not include a limit price 

component. All segmented orders that are market orders would be subject to the order 

competition requirement prior to execution because, by definition, such orders are instructed to 

                                                
198  See infra section IV.B.5. 



83 

 

be executed immediately at the best available prices. For segmented orders that are limit orders, 

compliance with the order competition requirement would depend on the relation of the 

segmented order’s limit price to the NBBO at the time it was received by the restricted 

competition trading center. For segmented orders with limit prices that are equal to or more 

favorable for the segmented order than the NBBO midpoint at the time of receipt (lower for buy 

orders and higher for sell orders), execution of the order would qualify for the exceptions from 

the order competition requirement in paragraphs (b)(3) and (b)(4) of Proposed Rule 615. Given 

the favorable price at which these non-marketable orders would be executed, however, they often 

may be publicly displayed as a means to attract contra-side trading interest (as well as to comply 

with Rule 604 of Regulation NMS). 

Segmented orders with a limit price that is less favorable for the segmented order than the 

NBBO midpoint at the time of receipt (i.e., segmented buy orders with a limit price higher than 

the NBBO midpoint and segmented sell orders with a limit price lower than the NBBO 

midpoint) often would not be executed at the NBBO midpoint or better (and therefore would not 

qualify for the exceptions in paragraphs (b)(3) or (b)(4) of Proposed Rule 615(b)(3)). Those 

orders not executed at the NBBO midpoint or better necessarily will pay a half-spread of some 

amount on the transaction (i.e., orders executed beyond the NBBO midpoint, by definition, are 

paying a spread), even if it is less than the full NBBO half-spread. These include segmented 

orders that are marketable and a subset of non-marketable limit orders with limit prices that are 

beyond the NBBO midpoint but within the far-side NBBO (lower than the national best offer for 

segmented orders to buy and higher than the national best bid for segmented orders to sell) 

(hereinafter referred to as “beyond-the-midpoint non-marketable limit orders”). A broker-dealer 

responsible for handling this subset of segmented orders that are non-marketable would need to 



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determine how to achieve best execution of such orders. Under the limit order display 

requirements of Rule 604 of Regulation NMS, as discussed in section III.B.2.a above, such an 

order generally would need to be immediately displayed (which would narrow the NBBO 

spread) or immediately executed. To immediately execute the order, a restricted competition 

trading center would need to comply with the order competition requirement of Proposed Rule 

615(a). 

 

The term “open competition trading center,” as proposed to be defined in Rule 

600(b)(64), determines the scope of coverage of Proposed Rule 615 in two important respects. 

First, it identifies those trading centers that would be authorized to operate qualified auctions. 

Second, it conversely specifies those trading centers that would be subject to the order 

competition requirement of paragraph (a) of Proposed Rule 615 because a “restricted 

competition trading center” is defined as any trading center other than an open competition 

trading center or a national securities exchange. 

The proposed definition of open competition trading center is designed to address three 

primary concerns. First and foremost, trading centers that operate qualified auctions must offer 

sufficient access, transparency, and trading by a wide range of market participants to support the 

goal of fair competition in auctions to provide the best prices for investor orders. Second, the 

proposed definition of open competition trading center seeks to establish as level a regulatory 

playing field as possible regarding Proposed Rule 615 between the national securities exchanges 

and NMS Stock ATSs199 that are eligible to operate a qualified auction, while recognizing the 

                                                
199  The Commission is proposing that for purposes of Regulation NMS, which would include Proposed Rule 

615, NMS Stock ATS, as would be defined in Proposed Rule 600(b)(59), will have the meaning provided 

in 17 CFR 242.300(k) (Rule 300(k) of Regulation ATS). 



85 

 

distinct regulatory regimes for national securities exchanges under the Exchange Act and for 

NMS Stock ATSs under Regulation ATS.200 As described in section III.A above, section 

11A(c)(1)(F) of the Exchange Act grants rulemaking authority to the Commission to assure 

equal regulation of all markets for NMS stocks, with equal regulation defined in section 3(a)(36) 

to mean that no member of a class has a competitive advantage over any other member of a class 

resulting from a regulatory disparity that the Commission determines is unfair and not necessary 

or appropriate in furtherance of the purposes of the Exchange Act.201 Qualified auctions would 

be a new trading mechanism, mandated by rule in some contexts, that could be operated by both 

national securities exchanges and NMS Stock ATSs, and open competition trading centers would 

be a new class of market participants. Because national securities exchanges and NMS Stock 

ATSs operating as open competition trading centers would fall within the same class of market 

participant, and given the functional similarity between these two types of trading centers, 

neither type should have a competitive advantage in operating qualified auctions that is 

attributable to an unfair and unnecessary regulatory disparity.202 Third, the proposed definition of 

                                                
200  A trading center that operates a qualified auction for segmented orders necessarily would fall within the 

definition of an exchange under section 3(a)(1) of the Exchange Act [15 U.S.C. 78c(a)(1)], and 17 CFR 

240.3b-16(a) (“Rule 3b-16(a)”) thereunder, because it would be bringing together the orders of multiple 

buyers and sellers using established non-discretionary methods (i.e., the qualified auction trading facility) 

under which such orders would interact and the buyers and sellers would agree upon terms of a trade. If a 

trading center falls within the definition of an exchange, it either must register as an exchange or comply 

with an exemption to such registration, such as the exemption for ATSs under Regulation ATS.  

201  15 U.S.C. 78c(a)(36). In discussing equal regulation in the context of Exchange Act Section 11A(c)(1), the 

Commission stated that the legislative history of section 3(a)(36) emphasizes that equal regulation “is a 
competitive concept intended to guide the Commission in its oversight and regulation of the trading 

markets and the conduct of the [s]ecurities industry.” See Securities Exchange Act Release No. 42208 

(Dec. 1999), 64 FR 70613, 70623 n.80 (Dec. 17, 1999) at 70623 n.80 (Concept Release on Market 

Information Fees and Revenues) (quoting S.Rep. No. 94-75, 94th Cong., 1st Sess. 7 (1975) at 94). 

202  The Commission has expressed, in other contexts, its belief that the regulatory differences between NMS 

Stock ATSs and national securities exchanges may create a competitive imbalance between two 

functionally similar trading centers, and sought to address those concerns by more closely aligning certain 

requirements for NMS Stock ATSs with those of national securities exchanges. See, e.g., ATS-N Adopting 

Release, supra note 159, 83 FR at 38775-76. 



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open competition trading center is designed to address a concern that qualified auctions, as a new 

mandatory mechanism for execution of segmented orders, should not further exacerbate the 

fragmentation of trading interest in NMS stocks among different trading centers that already 

characterizes the NMS. As discussed in section VII.B.1 below, trading centers for NMS stocks 

include 16 national securities exchanges, 32 NMS Stock ATSs,203 6 wholesalers, and more than 

230 other broker-dealers. Allowing only national securities exchanges and NMS Stock ATSs that 

meet the prescribed transparency and volume thresholds to meet the proposed definition of open 

competition trading center is also designed to prevent additional complexity and connectivity 

costs to market participants arising from the introduction of qualified auctions. Such trading 

centers that meet the proposed definition are likely to have already attracted a wide variety of 

market participants with the established connectivity necessary to promote vigorous competition 

in qualified auctions. 

Given the differing regulatory regimes for national securities exchanges and NMS Stock 

ATS that were described in section III above, the elements of the proposed definition of open 

competition trading center vary for national securities exchanges and NMS Stock ATSs. As 

discussed in section IV.D below, paragraph (d) of Proposed Rule 615 would prohibit both 

national securities exchanges and NMS Stock ATSs from operating a qualified auction if they do 

not meet the elements of the definition of an open competition trading center. 

 

As discussed in section III.A above, the Exchange Act sets forth a comprehensive 

regulatory regime for national securities exchanges with a variety of requirements that address, 

                                                
203  As of Sept. 30, 2022, there were 32 NMS Stock ATSs that had filed an effective Form ATS-N with the 

Commission.  



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among other things, access and competition. For example, national securities exchanges must 

allow any registered broker-dealer to become a member, subject to the limitations of section 6(c) 

of the Exchange Act, and their rules cannot impose a burden on competition not necessary or 

appropriate in furtherance of the purposes of the Exchange Act. The Commission has crafted the 

proposed definition of open competition trading center for national securities exchanges having 

taken into account that such exchanges already are subject by statute to this regulatory regime. 

The proposed definition of open competition trading center for national securities 

exchanges has four elements. First, such an exchange would be required to operate a trading 

facility that is an automated trading center and displays automated quotations that are 

disseminated in consolidated market data pursuant to Rule 603(b) of Regulation NMS. The terms 

“automated trading center” and “automated quotation” are defined in Rule 600(b)(8) and Rule 

600(b)(7) of Regulation NMS. Each is an element of the definition of a “protected bid or 

protected offer” in Rule 600(b)(70), which are eligible for protection against trade-throughs 

pursuant to Rule 611 of Regulation NMS. Rule 603(b) provides for the dissemination of 

consolidated market data by SROs. This element of the proposed definition of an open 

competition trading center would help ensure transparency of quotations and fair and efficient 

access to such quotations. It is also designed to ensure that qualified auctions are held on lit 

trading centers, and that the requirements for open competition trading centers are consistent 

between national securities exchanges and NMS Stock ATSs. Also, incorporating the 

requirements for an automated trading center and automated quotations would help ensure that 

such exchange has the necessary technology to run qualified auctions efficiently.  

Second, a national securities exchange would be required to provide transaction reports 

identifying it as the venue of execution that are disseminated in consolidated market data 



88 

 

pursuant to Rule 603(b). Identifying the venue of execution would help market participants 

assess where liquidity for an NMS stock can be found in the NMS, including for qualified 

auctions. Current arrangements for disseminating consolidated market data provide this 

execution venue information for exchanges, but not, as discussed below, for NMS Stock ATSs. 

This requirement is designed to provide a parallel requirement for national securities exchanges 

and NMS Stock ATSs operating qualified auctions, and require the identification of the venue of 

execution by rule for national securities exchanges operating as open competition trading 

centers. 

Third, a national securities exchange would be required to have had an average daily 

share volume of 1.0 percent or more of the aggregate average daily share volume for all NMS 

stocks as reported by an effective transaction reporting plan during at least four of the preceding 

six calendar months.204 The proposed 1.0 percent threshold across all NMS stocks, and not 

merely for a single NMS stock, is designed to help ensure that, prior to operating a qualified 

auction, the national securities exchange has attracted a wide range of market participants with 

connectivity to such exchange already in place that would be sufficient to support vigorous 

competition in qualified auctions to provide the best prices for segmented orders. As of 

September 30, 2022, 6 of the 16 national securities exchanges trading NMS stocks reported less 

than 1% of share volume in NMS stocks.205 Five of these (Nasdaq BX, Nasdaq Phlx, NYSE 

American, NYSE CHX, and NYSE National), however, were part of exchange groups with other 

national securities exchanges that reported more than 1% of share volume in NMS stocks. Any 

                                                
204  As discussed in section IV.B.2.b below, NMS Stock ATSs operating as open competition trading centers 

would be subject to the same volume threshold. 

205  See, e.g., Cboe, U.S. Historical Market Volume Data, available at 

https://cboe.com/us/equities/market_statistics/historical_market_volume/.  

https://cboe.com/us/equities/market_statistics/historical_market_volume/


89 

 

exchange that was below the 1% threshold, even if it were part of a group of exchanges with 

some exchanges that meet the threshold, would not meet the definition of an open competition 

trading center and could not operate a qualified auction. The one remaining national securities 

exchange that reported less than 1% of share volume in NMS stocks was LTSE, with less than 

0.01% of share volume in NMS stocks.  

The 1% threshold also would impose a hurdle for a new entrant that wished to register as 

a national securities exchange to become an open competition trading center. In the absence of a 

minimum volume threshold, however, the introduction of qualified auctions as a new trading 

mechanism mandated by regulation could lead to the entry of multiple new national securities 

exchanges intended solely to operate qualified auctions, which could result in either (1) a 

substantial increase of connectivity costs and complexity for market participants to connect to 

every open competition trading center, or (2) a refusal of many market participants to incur such 

costs and complexity, which could detract from the level of competition to provide the best 

prices for segmented orders at open competition trading centers with relatively few connected 

market participants. The 1% threshold is designed to be low enough to help ensure that the core 

competition objective of Proposed Rule 615 is achieved through qualified auctions operated by 

multiple national securities exchanges, while being high enough to demonstrate that a national 

securities exchange has attracted a sufficient level of interest from market participants to avoid 

unduly exacerbating the already substantial level of fragmentation in NMS stocks.  

Given that only a small percentage of marketable orders of individual investors currently 

are routed to national securities exchanges, the competitive opportunity to operate qualified 

auctions that would enable their members and members’ customers to interact with low-cost 

marketable order flow is likely to be an attractive new line of business. If, for example, a single 



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national securities exchange began operating qualified auctions, it would have a monopoly on the 

business, which would be quite likely to attract multiple additional competitors. It therefore is 

likely that each of the three exchange groups associated with CBOE, Nasdaq and NYSE would 

select one of their national securities exchanges to operate qualified auctions,206 and the three 

non-group national securities exchanges that exceed the 1% threshold would operate qualified 

auctions as well. 

Fourth and finally, a national securities exchange would be required to operate pursuant 

to its own rules providing that such exchange will comply with the proposed requirements for 

qualified auctions in paragraph (c) of Proposed Rule 615. This element would help to ensure that 

the operation of a qualified auction would be fully described in the exchange’s rules and that the 

exchange’s compliance with those rules would be subject to the examination and enforcement 

tools in place for exchange rules.207 Market participants therefore would be able to reference the 

rules of a national securities exchange to determine whether it operates a qualified auction and 

the material terms of such auctions, including the hours of operation. 

 

As discussed above in section III.B, NMS Stock ATSs are subject to a quite different set 

of statutory and regulatory requirements than national securities exchanges. The definition of 

open competition trading center for NMS Stock ATSs would reflect these differences and 

includes seven elements. 

                                                
206  See infra note 276 and accompanying text.  

207  Also, because national securities exchanges must file with the Commission proposed changes to their rules, 

an exchange’s adoption of rules for operating qualified auctions would be subject to public notice, 

comment, and Commission review, as well as Commission oversight. See 15 U.S.C. 78s(b). 



91 

 

First, an NMS Stock ATS would be required to display quotations through an SRO 

display-only facility (currently, the only such facility is FINRA’s ADF) in compliance with Rule 

610(b) of Regulation NMS.208 To add an NMS Stock ATS as a new ADF participant, FINRA 

would need to file a proposed rule change that, after an opportunity for public notice and 

comment and review by the Commission, became effective pursuant to section 19(b) of the 

Exchange Act and Rule 19b-4 thereunder.209 An NMS Stock ATS, by displaying quotations in 

the ADF that FINRA provides to the SIPs, would have established an ability to disseminate 

information in consolidated market data, as would be required for auction messages under 

Proposed Rule 615(c)(1). In addition, as discussed in section III.B above, Rule 610(b) imposes 

heightened connectivity obligations on an NMS Stock ATS that displays quotations in the ADF, 

which would help assure that market participants have fair and efficient access to any NMS 

Stock ATS that wished to operate a qualified auction. This requirement is not needed for national 

securities exchanges, which, as discussed in section III.A above, are subject to a series of 

Exchange Act access requirements. 

Second, an NMS Stock ATS would be required to operate as an automated trading center 

and display automated quotations that are disseminated in consolidated market data pursuant to 

Rule 603(b) of Regulation NMS. This element matches an element of the proposed definition of 

open competition trading center for national securities exchanges and is proposed for the same 

reason. 

                                                
208  Under Rule 600(b)(88), the term “SRO display-only facility” means a facility operated by or on behalf of a 

national securities exchange or national securities association that displays quotations in a security, but 

does not execute orders against such quotations or present orders to members for execution. As discussed 

above in section III.B.3, FINRA’s ADF is the only SRO display-only facility, but currently has no 

participating members. 

209  See Regulation NMS Adopting Release, supra note 78, 70 FR at 37543 (addition of ADF participant would 

constitute a change to a material aspect of FINRA’s facilities that would require the filing of a proposed 

rule change).  



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Third, an NMS Stock ATS would be required to identify the NMS Stock ATS as the 

venue of execution in transaction reports that are disseminated in consolidated market data 

pursuant to Rule 603(b). As discussed above, this element also would be required for national 

securities exchanges and is designed to help market participants assess where liquidity can be 

found in the NMS for a particular NMS stock. In contrast to the transaction reports of national 

securities exchanges, the transaction reports of off-exchange venues that FINRA currently 

provides for dissemination in consolidated market data do not identify the particular FINRA 

member (including both NMS Stock ATSs and broker-dealers) that reported the trade. For NMS 

Stock ATSs that display quotations in the ADF and operate qualified auctions, full post-trade 

transparency concerning the identity of the NMS Stock ATS that executed trades, including the 

execution of segmented orders in qualified auctions, would be needed to promote fair 

competition among markets and the practicability of broker-dealers determining the best market 

for executing customer orders. For example, real-time dissemination of a transaction report 

indicating that an NMS Stock ATS had executed a segmented order in an NMS stock in a 

qualified auction could assist broker-dealers in identifying where to route segmented orders, as 

well as market participants in identifying where they could interact with segmented orders in 

qualified auctions. Accordingly, if Proposed Rule 615 were adopted, an NMS Stock ATS would 

not be able to meet the definition of an open competition trading center unless the effective NMS 

plans for NMS stocks were conformed to provide for the collection and dissemination of an 

identification of the NMS Stock ATS as the venue of execution in its transaction reports.  



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Fourth, an NMS Stock ATS would be required to permit any registered broker-dealer to 

become a subscriber,210 except those with statutory disqualifications or financial responsibility or 

operational capability concerns. This element parallels the Exchange Act section 6(b)(2) 

requirement that, subject to the provisions of section 6(c), a national securities exchange must 

permit any registered broker-dealer to become a member. It thereby would help ensure that all 

market participants seeking to trade on an NMS Stock ATS, whether they be broker-dealers 

trading proprietarily or investors trading through the services of a broker-dealer, would have 

access to the NMS Stock ATS in the same manner as they have access to national securities 

exchanges. An NMS Stock ATS could not, however, permit a registered broker-dealer subject to 

a statutory disqualification to become a subscriber.211 In contrast, national securities exchanges 

may, subject to Commission oversight, allow a registered broker-dealer with a statutory 

disqualification to become a member.212 The stricter standard for NMS Stock ATSs is 

appropriate because, as non-SROs, they are not subject to the same level of Commission 

oversight as national securities exchanges.213 For example, section 6(c)(2) of the Exchange Act 

                                                
210  NMS Stock ATSs generally have subscribers, unlike national securities exchanges with self-regulatory 

responsibilities for members. The proposed definition of “subscriber” in Rule 600(b)(100) of Regulation 

NMS is a cross-reference to the definition of “subscriber” in 17 CFR 242.300(b) (Rule 300(b) of 

Regulation ATS). The Regulation ATS definition is being proposed to be used in this context to leverage 

industry experience and help minimize compliance costs. 

211  Proposed Rule 600(b)(64)(ii)(D)(1). 

212  Pursuant to Exchange Act section 6(c)(2), a national securities exchange may, and in cases in which 

the Commission, by order, directs as necessary or appropriate in the public interest or for the protection of 

investors shall, deny membership to any registered broker or dealer or natural person associated with a 
registered broker or dealer, and bar from becoming associated with a member any person, who is subject to 

a statutory disqualification. If a national securities exchange knowingly allows a registered broker-dealer 

with a statutory disqualification to become a member, or should have known in the exercise of reasonable 

care, section 6(c)(2) further requires the national securities exchange to file notice with the Commission. 

213  See, e.g., Regulation ATS Adopting Release, 63 FR at 70858 (discussing when ATS regulation may not be 

appropriate and stating that “it may be necessary for the Commission’s greater oversight authority over 

registered exchanges to apply”). 

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provides that a national securities exchange must file notice with the Commission not less than 

thirty days prior to admitting any person to membership, if the exchange knew, or in the exercise 

of reasonable care should have known, that such person was subject to a statutory 

disqualification. An NMS Stock ATS is not subject to this notice requirement. An NMS Stock 

ATS could, however, pursuant to written policies and procedures, prohibit any registered broker-

dealer from becoming a subscriber, or impose conditions upon such a subscriber, that did not 

meet specified standards of financial responsibility and operational capability.214 This ability to 

prohibit or limit subscribers is patterned on the ability of national securities exchanges under 

section 6(c)(3)(A) of the Exchange Act,215 which also permits a national securities exchange to 

deny or condition membership to a broker-dealer that has engaged, and is reasonably likely to 

engage again, in acts or practices inconsistent with just and equitable principles of trade. It would 

not be appropriate for NMS Stock ATSs, as non-SROs, to have this disciplinary authority over 

its subscribers. 

Fifth, an NMS Stock ATS would be required to provide equal access among all 

subscribers of the NMS Stock ATS and the registered broker-dealer of the NMS Stock ATS to 

all services that are related to a qualified auction operated by the NMS Stock ATS under 

Proposed Rule 615(c) and to any continuous order book operated by the NMS Stock ATS. This 

                                                
214  An NMS Stock ATS must disclose on its Form ATS-N whether it can exclude, in whole or in part, any 

subscriber from the ATS’s services, and if so, it must provide a summary of the conditions for excluding, in 

whole or in part, a subscriber from those services. Form ATS-N, Part III, Item 3.a. Consequently, an NMS 

Stock ATS would be required to disclose its policies and procedures for excluding a broker-dealer on its 

Form ATS-N. Additionally, an NMS Stock ATS that is subject to the fair access requirements of Rule 

301(b)(5) (see supra section III.B.3), must also disclose a list of all persons granted, denied, or limited 

access to the ATS during the quarterly period covered by the report, and, among other things, the nature of 

any denial or limitation of access. Form ATS-R, Instruction 8 and Item 7. 

215  Pursuant to Exchange Act section 6(c)(3), a national securities exchange may deny membership to, or 
condition the membership of, a registered broker or dealer if such broker or dealer does not meet such 

standards of financial responsibility or operational capability or such broker or dealer or any natural person 

associated with such broker or dealer does not meet such standards of training, experience, and competence 

as are prescribed by the rules of the exchange.  

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equal access element would require an NMS Stock ATS to provide access on the same terms and 

conditions among all subscribers and the registered broker-dealer of the NMS Stock ATS. It 

therefore would impose a more stringent standard on NMS Stock ATSs than the “no unfair 

discrimination” standard for national securities exchanges under section 6(b)(5) of the Exchange 

Act. The more stringent standard is designed to reflect the different statutory and regulatory 

regimes for NMS Stock ATSs and national securities exchanges and particularly to help achieve 

the goal of equal regulation, as defined in section 3(b)(36) of the Exchange Act and described in 

section III.A above. 

For example, as discussed in section III above, national securities exchanges must 

comply with a variety of statutory requirements that are not applicable to NMS Stock ATSs. 

While they fall within the statutory definition of an exchange, NMS Stock ATSs have been 

exempted from compliance with the statutory requirements for registered national securities 

exchanges if they are registered as a broker-dealer and comply with Regulation ATS. Among 

other things, the rules for all national securities exchanges (1) must be designed affirmatively to 

remove impediments to and perfect the mechanism of a free and open market and an NMS; (2) 

must not be designed to permit unfair discrimination between customers, issuers, or broker-

dealers; and (3) must not impose any burden on competition that is not necessary or appropriate 

in furtherance of the purposes of the Exchange Act.216  

Each of the foregoing requirements promotes the objective of ensuring fair and efficient 

access to the trading services of national securities exchanges, which is essential for promoting 

fully competitive pricing in qualified auctions, but none applies to NMS Stock ATSs. While they 

                                                
216  As discussed above, in comparison, national securities exchanges are also required to file proposed rule 

changes to establish or modify trading services, which must be published for public comment. See supra 

notes 68-71, 207, and accompanying text. 



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must file amendments to Form ATS-N, the amendments are not published for public comment 

and do not require Commission approval prior to implementation. Moreover, the standards for 

access to NMS Stock ATSs are much more limited than those that apply to national securities 

exchanges.217 An NMS Stock ATS must comply with the fair access requirement of Rule 

301(b)(5) only for a particular NMS stock in which it exceeds 5% of volume.218 As discussed 

above in sections II.B and III.B.3.b, only one NMS Stock ATS discloses on its Form ATS-N that 

it is subject to this fair access requirement for securities that are available for trading on its 

platform. Most importantly, in light of the core order competition requirement of Proposed Rule 

615, Regulation ATS does not impose any requirement on NMS Stock ATSs that is equivalent to 

section 6(b)(8) of the Exchange Act, which prohibits national securities exchanges from 

imposing any burden on competition not necessary or appropriate in furtherance of the 

provisions of the Exchange Act. 

Given that NMS Stock ATSs currently are subject to different requirements for 

promoting fair and efficient access to their trading services than are national securities exchange, 

the Commission believes an NMS Stock ATS should be required to meet a more stringent 

standard to help ensure equal regulation regarding Proposed Rule 615 and sufficient access and 

transparency for a wide range of market participants. Accordingly, an NMS Stock ATS would, if 

it wished to operate a qualified auction under Proposed Rule 615, be required to provide equal 

access to all trading services related to its qualified auctions, as well as to all trading services 

related to a continuous order book operated by the NMS Stock ATS. The extension of equal 

access to services related to a continuous order book is needed because, as discussed in section 

                                                
217  See, e.g., ATS-N Adopting Release, supra note 159, 83 FR at 38841. 

218  17 CFR 242.301(b)(5)(i). 



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IV.C below, such a book would be required to be integrated with qualified auctions.219 The 

proposed equal access requirement is designed to help ensure a level playing field regarding 

Proposed Rule 615 for competition among national securities exchanges and NMS Stock ATSs 

and thereby promote the Exchange Act principle of equal regulation. Specifically, consistent 

with the NMS objective in section 11A(1)(C)(ii) of promoting fair competition among markets, 

neither type of trading center should have a significant regulatory advantage for operating 

qualified auctions that could drive volume in such auctions to either type, whether it be national 

securities exchanges or NMS Stock ATSs. 

Sixth, an NMS Stock ATS would be required to have had an average daily share volume 

of 1.0 percent or more of the aggregate average daily share volume for NMS stocks as reported 

by an effective transaction reporting plan during at least four of the preceding six calendar 

months.220 The methodology for this calculation would be the same as prescribed for application 

of the fair access requirements of ATSs by Rule 301(b)(5)(i)(A) of Regulation ATS, except that 

the numerator and denominator in the percent calculation is volume in all NMS stocks, rather 

than in any particular NMS stock. As with the fair access requirement, the proposed 

methodology is designed to encompass NMS Stock ATSs that have demonstrated a consistent 

                                                
219  As discussed below in section IV.C.5, a displayed order resting on the continuous order book would have 

priority over an equally-priced auction response, and an undisplayed order resting on the continuous order 

books would have priority if it provided a better price for a segmented orders than an auction response. 

220  A 1% volume threshold in NMS stocks is also one of the thresholds used to determine whether an NMS 

Stock ATS is an SCI entity subject to the requirements of 17 CFR 242.1000 through 242.1007 (“Regulation 

SCI”). See 17 CFR 242.1000 paragraph (1)(ii) of “SCI alternative trading system or SCI ATS” definition, 

and “SCI entity” definition. Among other things, each SCI entity is required to comply with the capacity, 

integrity, resiliency, availability, and security requirements of Rule 1001 of Regulation SCI. In adopting a 

volume threshold for NMS Stock ATSs for purposes of Regulation SCI, the Commission recognized that 
certain ATSs play an important role in today’s securities markets, and that higher volume ATSs 

collectively represent a significant source of liquidity for NMS stocks, with some ATSs having similar and, 

in some cases, greater trading volume than some national securities exchanges. See Securities Exchange 

Act Release No. (Nov. 19, 2014), 73639 79 FR 72252, 72262 (Dec. 5, 2014) (adopting Regulation SCI and 

related amendments to Regulation ATS). 



98 

 

historical level of volume. To promote fair competition and equal regulation, this proposed 

element is the same as that proposed for national securities exchanges and is proposed for the 

same primary reasons — (1) to help ensure that an NMS Stock ATS has attracted a wide range of 

market participants with connectivity already in place that would be sufficient to support 

vigorous competition in qualified auctions to provide the best prices for segmented orders; and 

(2) to avoid exacerbating the costs and complexity of fragmentation that already exists of trading 

interest in NMS stocks.  

Seventh and finally, an NMS Stock ATS would be required to operate pursuant to an 

effective Form ATS-N that sets forth the operations of the qualified auction and compliance by 

the NMS Stock ATS with the requirements of Proposed Rule 615(c) for a qualified auction, as 

well as with all of the other elements of the definition of open competition trading center for 

NMS Stock ATSs that are discussed above. This proposed disclosure element is designed to 

ensure that an NMS Stock ATS fully discloses material operating practices to the public on Form 

ATS-N, and that these operating practices are subject to the examination and enforcement tools 

in place for NMS Stock ATSs. Market participants therefore would be able to reference the Form 

ATS-N of an NMS Stock ATS to determine whether it operates a qualified auction and the 

material terms of such auctions, including the hours of operation. 

 

The proposed definition of restricted competition trading center221 encompasses any 

trading center that is neither an open competition trading center nor a national securities 

exchange. Some national securities exchanges may not meet all of the elements of the proposed 

definition of an open competition trading center, such as the minimum 1% volume threshold. 

                                                
221  Proposed Rule 600(b)(87). 



99 

 

Nevertheless, all national securities exchanges, as well as open competition trading centers, 

would be excluded from the definition of restricted competition trading center because both these 

types of trading centers either are not permitted by the Exchange Act (in the case of all national 

securities exchanges) or would not be permitted by Proposed Rule 615(d)(1) and its 

incorporation of the proposed definition of an open competition trading center (in the case of 

NMS Stock ATSs) to unfairly restrict access to their platforms.  

Currently, no NMS Stock ATS displays quotations in the ADF. Unless this changes,222 no 

NMS Stock ATS would meet the proposed definition of an open competition trading center, and 

therefore all would be restricted competition trading centers. The three other types of broker-

dealer trading centers are exchange market makers, OTC market makers (including wholesalers), 

and internalizing broker-dealers.223 These broker-dealers, as stated in section IV.B.2 above, 

could not operate a qualified auction without falling within the Exchange Act definition of 

exchange.224 Unless such a broker-dealer became an NMS Stock ATS and met all of the 

elements of the proposed definition of an open competition trading center, it would fall within 

the definition of a restricted competition trading center and would be subject to the order 

competition requirements of Proposed Rule 615(a). 

 

As discussed in section IV.E below, originating brokers would perform several vital 

functions under Proposed Rule 615, including making the original determination that an order 

falls within the definition of a segmented order and identifying the order as such when routed for 

                                                
222  See supra note 208. 

223  See supra section II.B.  

224  See supra note 200 and accompanying text. 



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execution. The proposed definition of originating broker225 reflects these important functions. It 

would cover any broker with responsibility for handling a customer account, including, but not 

limited to, opening and monitoring the customer account and accepting and transmitting orders 

for the customer account.226 As such and as discussed further below, there may be more than one 

originating broker for a particular customer account. 

The Commission understands that broker business practices can vary widely in terms of 

how customer accounts are handled. Some brokers may perform this entire function internally, 

while others may work with additional brokers to handle customer orders. A single broker that is 

solely responsible for the handling of a customer account would be an originating broker. To the 

extent that multiple brokers perform different functions for a customer account (sometimes 

referred to as “introducing brokers,” “carrying brokers,” or “clearing brokers”), each such broker 

would be an originating broker. In addition, as discussed further in section IV.E below, different 

types of brokers enter into agreements with one another to allocate certain responsibilities with 

respect to their handling of customer accounts.227 As discussed in section IV.C.1 below, 

                                                
225  Proposed Rule 600(b)(69). 

226  The broker-dealer functions specifically enumerated in the proposed definition of originating broker are 

included in the list of responsibilities that FINRA requires its members to allocate for accounts that are 

carried on an omnibus or fully disclosed basis. See infra note 227. See also Securities Investment Advisers 

Act Release No. 5429 (June 5, 2019), 84 FR 33681 (July 12, 2019) (clarifying the scope of the broker-

dealer exclusion from the definition of “investment adviser” under the Investment Advisers Act of 1940 for 

broker-dealers whose performance of advisory services is “solely incidental” to the conduct of its business 

as a broker-dealer and for which the broker-dealer “receives no special compensation”); and Regulation BI 

Adopting Release, supra note 187, at 33358 (discussing disclosure requirements for broker-dealers related 

to “monitoring the performance of the retail customer’s account”). 

227  FINRA Rule 4311 addresses the allocation of responsibilities between members for accounts that are 

carried on an omnibus or fully disclosed basis. FINRA Rule 4311(c)(1) specifies the minimum 

requirements for carrying agreements in which accounts are carried on a fully disclosed basis. FINRA Rule 

4311(c)(1) (“Each carrying agreement in which accounts are to be carried on a fully disclosed basis shall 

specify the responsibilities of each party to the agreement, including at a minimum the allocation of the 

responsibilities set forth in paragraphs (c)(1)(A) through (I) and (c)(2) of this Rule.”); FINRA Rules 

4311(c)(1)(A) through (I) (“(A) Opening and approving accounts. (B) Acceptance of orders. (C) 

Transmission of orders for execution. (D) Execution of orders. (E) Extension of credit. (F) Receipt and 

delivery of funds and securities. (G) Preparation and transmission of confirmations. (H) Maintenance of101 

 

paragraph (c)(1)(ii) of Proposed Rule 615 specifies that, if multiple brokers for a segmented 

order fall within the proposed definition of originating broker, the broker responsible for 

approving the opening of accounts for customers (commonly performed by an introducing 

broker) would be required to be identified in auction messages under Proposed Rule 615(c)(1). 

 

Paragraph (b) of Proposed Rule 615 sets forth five exceptions from the order competition 

requirement of paragraph (a). The first exception is for a segmented order that is received and 

executed by a restricted competition trading center during a time period when no open 

competition trading center is operating a qualified auction for the segmented order. This 

exception would be necessary to enable segmented orders to trade during such a time period, 

since compliance with Proposed Rule 615 would otherwise be impossible if no qualified auction 

were available. Proposed Rule 615 does not specify any particular time period during which an 

open competition trading center must operate a qualified auction. Given, however, the 

requirement in paragraph (c)(3) of Proposed Rule 615 that auction messages must be provided 

for dissemination in consolidated market data,228 a qualified auction could not operate at any 

time when the facilities for disseminating consolidated market data were not operating. As 

discussed in section III.B above, such facilities currently are operated by the SIPs. The current 

SIP hours of operation are from 4 a.m. to 8 p.m. eastern time on trading days for the U.S. equity 

                                                
books and records. (I) Monitoring of accounts.”); FINRA Rule 4311(c)(2) (prescribing the requirements for 

how each carrying agreement in which accounts are to be carried on a fully disclosed basis must allocate 

responsibility for the safeguarding of funds and securities, and the preparing and transmitting of statements 
of accounts to customers). FINRA Rules are available at https://www.finra.org/rules-

guidance/rulebooks/finra-rules. 

228  The phrase “provided for dissemination in consolidated market data” reflects that, while national securities 

exchanges send quotation and transaction information directly to the SIPs, NMS Stock ATSs would 

provide such information to the ADF operated by FINRA, which would send the information to the SIPs. 

https://www.finra.org/rules-guidance/rulebooks/finra-rules
https://www.finra.org/rules-guidance/rulebooks/finra-rules


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markets. While the trade-through restrictions of Rule 611 of Regulation NMS apply only during 

regular trading hours of 9:30 a.m. to 4:00 p.m. eastern time,229 the order competition requirement 

of Proposed Rule 615(a) is needed for additional hours given the enhanced risks for individual 

investors. Unlike Rule 611, Proposed Rule 615 is narrowly targeted on protecting the interests of 

individual investors and the risks they face when using marketable orders to trade in NMS 

stocks. These include the risks of lower liquidity and wider spreads that are particularly 

significant in after-hours trading and that qualified auctions could address effectively.230  

The second exception from Proposed Rule 615 would be for large orders with a market 

value of at least $200,000 calculated with reference to the NBBO midpoint when the order is 

received by a restricted competition trading center. This exception is designed to address the 

heightened liquidity need of large orders that often may be more appropriately addressed outside 

of a qualified auction. The $200,000 threshold is the same dollar amount as in other Regulation 

NMS rules to exclude orders or trades that are so large as to warrant different treatment than 

smaller orders.231 A specific methodology for calculating market value (NBBO midpoint at time 

of order receipt) is prescribed to provide additional clarity for restricted competition trading 

centers on complying with Proposed Rule 615 that should be readily implementable when 

qualified auctions are operating. The $200,000 threshold is designed to except orders that may be 

difficult to execute efficiently in qualified auctions at prices that generally would be at or within 

the NBBO. While these large orders are eligible for an exception, they still would meet the 

                                                
229  See Rule 600(b)(94) of Regulation NMS (limiting definition of trade-through to regular trading hours); 

Rule 600(b)(77) of Regulation NMS (defining regular trading hours). 

230  See FINRA Rule 2265 (Extended Hours Trading Risk Disclosure) (requiring disclosure to customers of the 

risks of extended hours trading, including the risks of lower liquidity and wider spreads). 

231  See, e.g., Rule 604(b)(4) of Regulation NMS (providing an exception for orders of block size from required 

limit order display) and Rule 600(b)(12) of Regulation NMS (defining “block size” as, in part, an order for 

a quantity of stock having a market value of at least $200,000). 



103 

 

definition of a “segmented order” and could be routed for execution in a qualified auction if the 

broker-dealer handling the order determines that such routing would promote best execution of 

the segmented order.  

The third exception, provided by Proposed Rule 615(b)(3), is for segmented orders that 

are executed by a restricted competition trading center at a price that is equal to the NBBO 

midpoint or more favorable for the segmented order (i.e., the NBBO midpoint or lower for 

segmented orders to buy or the NBBO midpoint or higher for segmented orders to sell), as 

determined with reference to the NBBO at the time the segmented order was received by the 

restricted competition trading center. For trades at these prices, an investor would either be 

paying no spread (with a price at the NBBO midpoint) or earning a spread (with a buy order 

executed at a price lower than the NBBO midpoint and a sell order executed at a price higher 

than the NBBO midpoint). In such circumstances, the submission of a segmented order to a 

qualified auction would not be necessary to obtain a competitive price for such order. 

The fourth exception, provided by Proposed Rule 615(b)(4), is for segmented orders that 

are limit orders with a limit price selected by the customer that is equal to or more favorable for 

the segmented order than the midpoint of the national best bid and national best offer when the 

segmented order is received by the restricted competition trading center. This exception is 

designed so that when the customer has selected a limit price that will result in a favorable 

execution, submission of the segmented order to a qualified auction would not be necessary to 

obtain a competitive price. This exception would work in conjunction with the third exception 

for executions of segmented orders at a price equal to the midpoint or more favorable to the 

segmented order. As discussed above in section IV.B.1, this exception would not apply to 

beyond-the-midpoint non-marketable limit orders. 



104 

 

Finally, the fifth exception, provided by Proposed Rule 615(b)(5), is for the fractional 

share component of a segmented order. Fractional share orders typically are submitted by 

individual investors in dollar sizes rather than share sizes, and often are referred to as “cash 

orders.” If the dollar size of an order is less than the share price for an NMS stock (such as a 

$200 order for a $450 stock), the size of the order will be less than one share. If the dollar size of 

the order is greater than the share price for an NMS stock (such as a $1000 order for a $450 

stock), the size of the order will be greater than one share and have a fractional share component. 

While these orders for less than one share and orders for more than one share or with a fractional 

share component would fall within the definition of segmented order, they raise practical 

difficulties for executing in qualified auctions because currently, most trading centers, including 

all national securities exchanges, only accept orders with whole share sizes and do not accept 

orders for less than one share or orders with a fractional share component. The Commission is 

concerned that applying the requirements of Proposed Rule 615 to orders for less than one share 

and orders for more than one share with a fractional component would interfere with broker-

dealers willingness to accept such customer orders. For these reasons, Proposed Rule 615 would 

provide an exception for orders less than one share and the fractional component of a segmented 

order, if no qualified auction is available for such orders. Specifically, the rule would provide an 

exception if the segmented order is received and executed by the restricted competition trading 

center during a time period when no open competition trading center is operating a qualified 

auction for the segmented order that accepts orders that are not entirely in whole shares, and the 

customer selected a size for a segmented order that is not entirely in whole shares of an NMS 

stock, in which case any portion of such segmented order that is less than one whole share of the 

NMS stock, and only such portion, would not be subject to the order competition requirement of 



105 

 

Proposed Rule 615(a).232 As is the case with each of the exceptions, a broker-dealer’s 

responsibilities with respect to best execution of a segmented order, including the fractional 

share portion of a segmented order, would remain in effect. The exception would only address 

whether the segmented order, or fractional portion thereof, is required to be exposed in a 

qualified auction. 

Proposed Rule 615 does not provide an exception for orders directed by a customer to a 

particular restricted competition trading center for execution. Currently, 98% of the marketable 

orders of individual investors routed to wholesalers are not directed to any particular trading 

center, with the investor instead relying on their broker-dealer, and their broker-dealer’s best 

execution responsibilities, for order routing.233 Moreover, because the rule would only apply to 

the internalization of segmented orders by a restricted competition trading center, customers 

could continue to direct segmented orders to any trading center that was not a restricted 

competition trading center (i.e., an open competition trading center or national securities 

exchange, which are excluded from the definition of restricted competition trading center) 

without their orders being subject to the requirement for exposure in a qualified auction. 

Segmented orders directed to a restricted competition trading center would need to comply with 

Proposed Rule 615 and, absent an exception, be exposed to competition in a qualified auction. 

Any delay would be limited, however, to a very short, sub-second time period (as specified in 

Proposed Rule 615(c)(2)) and would give individual investors an opportunity to obtain fully 

competitive prices for their segmented order, as well as give other market participants, including 

institutional investors, an opportunity to interact with segmented orders.  

                                                
232  Proposed Rule 615(b)(5). 

233  See infra section VII.B.2.a for a discussion of the routing of individual investor orders in today’s market 

structure. 



106 

 

C. Qualified Auction Requirements 

The term “qualified auction” is proposed to be defined in Proposed Rule 600(b) of 

Regulation NMS as an auction that is operated by an open competition trading center pursuant to 

paragraph (c) of Proposed Rule 615.234 Paragraph (c), in turn, sets forth a series of specific 

requirements for qualified auctions, which could be operated only by national securities 

exchanges and NMS Stock ATSs that meet the definition of an open competition trading center. 

Given that routing segmented orders to qualified auctions would be mandated by rule in some 

contexts, these auctions should be operated in a manner that primarily promotes the core order 

competition objective of Proposed Rule 615.235 The proposed requirements for qualified auctions 

are designed to achieve this competition objective. 

 

Proposed Rule 615(c)(1) specifies the requirements for an auction message that 

announces the initiation of a qualified auction for a segmented order. The first is that the 

message must be provided for dissemination in consolidated market data pursuant to Rule 603(b) 

of Regulation NMS. As stated in section III.B.1 above, the Commission has adopted 

amendments to Regulation NMS that expand the information required to be included in 

consolidated market data, which would include auction information.236 Because these 

                                                
234  Proposed Rule 600(b)(81). 

235  A number of exchanges, for example, currently operate auctions for orders in listed options. See, e.g., 

CBOE Rule 5.37 (Automated Improvement Mechanism (“AIM” or “AIM Auction”)). These auctions are 
not mandated by Commission rule, and trading in listed options varies in important respects from trading in 

NMS stocks. For example, there are far more series of listed options than NMS stocks, which contributes to 

a market structure in which market makers dominate liquidity provision (a “quote-driven” market), rather 

than the “order-driven” market that characterizes NMS stocks. Proposed Rule 615 is designed to achieve 

policy objectives that are particular to mandatory auctions in NMS stocks. See also supra section I 

(discussing the difference between the markets for listed options and NMS stocks).  

236  Rule 600(b)(19) defines consolidated market data to include, among other things, core data, consolidated 

across all national securities exchanges and national securities associations. Rule 600(b)(21) defines core 



107 

 

amendments have not yet been implemented, if Proposed Rule 615 is adopted, the effective NMS 

plans for NMS stocks would need to be conformed to provide for the collection and 

dissemination of auction messages pursuant to Proposed Rule 615(c)(1)(i). The wide 

dissemination of qualified auction messages in consolidated market data would help ensure the 

broadest possible participation of market participants in qualified auctions and the best prices for 

segmented orders. 

The phrase “provided for dissemination in consolidated market data” reflects that, while 

national securities exchanges send quotation and transaction information directly to the SIPs, 

NMS Stock ATSs would provide such information to the ADF operated by FINRA, which would 

send the information to the SIPs.237 The primary purpose of an auction message is to promote 

competition by soliciting potential auction responses from a wide spectrum of market 

participants. The inclusion of the auction messages in consolidated market data, rather than being 

limited to the proprietary data feed of a national securities exchange or NMS Stock ATS, is 

designed to help achieve this purpose. In addition, wide dissemination of auction messages 

would help address some of the problems raised by the current level of fragmented trading 

interest in NMS stocks. For example, market participants that wish to interact with segmented 

orders would not need to predict the trading center to which segmented orders are likely to be 

routed and post a resting order in that trading center in advance of the arrival of a segmented 

order. Rather, market participants would be able to direct their auction responses to the particular 

open competition trading center that disseminated the auction message signaling that a 

segmented order was available for interaction. 

                                                
data to include, among other things, auction information with respect to quotations for, and transactions in, 

NMS stocks. 

237  See supra section III.B.1 (discussing rules addressing dissemination of consolidated market data). 



108 

 

Qualified auctions therefore may be useful, for example, to institutional investors that 

currently seek to trade with marketable order flow using resting undisplayed orders, often priced 

at the NBBO midpoint, that are intended to minimize information leakage concerning the 

typically large trading interest of institutional investors. Today, these market participants must 

select one or more trading centers on which to rest their orders based on predictions of the 

frequency and level of adverse selection costs of the marketable order flow with which they may 

interact at a particular trading center. With qualified auctions, such market participants would 

know the specific open competition trading centers where they could interact directly with 

segmented order flow that had low adverse selection costs. The Commission anticipates that 

qualified auctions thereby could benefit investors on both sides of the trades in qualified auctions 

— segmented orders could receive highly favorable prices (such as a “no spread” execution at 

the NBBO midpoint) and institutional investors would have a much greater opportunity to 

interact with the low-cost order flow of individual investors than they have today.238 Information 

leakage would be limited because, as discussed below, an institutional investor’s auction 

response would not be displayed, and, if the institutional investor traded in a qualified auction, 

the only displayed information would be a transaction report that maintained the anonymity of 

the parties to the transaction. 

Proposed Rule 615(c)(1) also specifies the information content of an auction message, 

including disclosure that the auction is for a segmented order, the identity of the open 

competition trading center, NMS stock symbol, side (buy or sell), size, limit price, and identity 

                                                
238  In addition to participating in qualified auctions by submitting auction responses, institutional investors 

could interact with segmented orders by submitting orders, including undisplayed NBBO midpoint orders, 

to the continuous order book of an open competition trading center that operates qualified auctions. As 

discussed below in section IV.C.5, any better-priced order resting on the continuous order book would have 

priority over lesser-priced auction responses to trade with segmented orders in a qualified auction.  



109 

 

of the originating broker for the segmented order. For auction responders, all of this information 

is necessary or useful in deciding whether to respond to the auction message and, if so, at what 

price. The fact that the order is a segmented order would indicate that the order is likely to have 

low adverse selection costs compared to other marketable order flow, such as orders routed to the 

continuous order books of national securities exchanges. Moreover, the identity of the 

originating broker likely would convey additional information concerning the level of adverse 

selection costs that an auction responder could expect. Data analysis indicates that adverse 

selection costs can vary substantially among different retail brokers.239 Knowing the identity of 

the originating broker would therefore be a significant piece of information in pricing an auction 

response. Accordingly, if only some market participants knew the identity of the originating 

broker, other potential responders may not participate due to fear of the winner’s curse (winning 

the least advantageous auctions and losing the most advantageous auctions because of an 

information disadvantage). Limited participation could harm the competitiveness of qualified 

auctions.  

Paragraph (c)(1)(ii) of Proposed Rule 615 specifies that, if multiple broker-dealers fall 

within the proposed definition of originating broker, it would be the broker-dealer responsible for 

approving the opening of accounts with customers240 (commonly performed by an introducing 

broker) that would be required to be identified by an open competition trading center in auction 

messages under Proposed Rule 615(c)(1). The business model of broker-dealers (including the 

types of services they offer and the nature of the commissions and fees they charge) determines 

the types of customers that broker-dealers will attract, and different business models may be 

                                                
239  Table 12, infra, section VII.B.5. 

240  See, e.g., FINRA Rule 4311(c)(1)(A); supra note 227 and accompanying text. 



110 

 

associated with lower or higher adverse selection costs. As between an introducing broker and a 

clearing broker, it is the introducing broker that typically determines the business model for 

attracting customers. For this reason, knowing the identity of the introducing broker associated 

with a segmented order (i.e., the broker typically with responsibility for approving the opening of 

the customer account) likely would be more important for market participants in assessing the 

potential adverse selection costs of trading with a segmented order than knowing the identity of 

other broker-dealers that may handle the segmented order during its lifecycle. Because the types 

of orders that would meet the definition of “segmented order” are generally associated with 

lower adverse selection costs,241 most originating brokers with responsibility for approving the 

opening of customer accounts likely would choose to have their identity disclosed in auction 

message. 

The Commission recognizes, however, that some originating brokers or their customers 

may not wish to have the identity of the originating broker for a segmented order publicly 

disseminated. Proposed Rule 615(c)(1)(iii) therefore would provide a choice for the originating 

broker. It could either allow its identity to be disclosed in an auction message or it could 

withhold this information by certifying that it has established, maintained, and enforced written 

policies and procedures reasonably designed to assure that its identity will not be disclosed, 

directly or indirectly, to any person that potentially could participate in the qualified auction or 

otherwise trade with the segmented order. If the originating broker makes this certification, 

paragraph (c)(1)(iii) would prohibit disclosure of the identity of the originating broker in the 

auction message.242 Proposed paragraph (c)(1)(iii) would also require that the certification be 

                                                
241  See infra section VII.B.2 discussing why certain orders are segmented because they are low-cost flow. 

242  See infra section IV.E discussing potential procedures for an originating broker to assure that its identity 

will not be disclosed. 



111 

 

communicated to the open competition trading center conducting the auction. In addition, 

proposed paragraph (e)(3), discussed in section IV.E below, specifies the requirements for an 

originating broker that makes the certification, and proposed paragraph (f)(2), discussed in 

section IV.F below, specifies certain trading prohibitions for any broker-dealer with knowledge 

of where a segmented order is to be routed for execution. The overriding purpose of these 

proposed requirements is to help ensure fair competition among auction responders and persons 

that could otherwise trade with the segmented order. If one or more auction responders or 

persons that could otherwise trade with the segmented order knew the identity of the originating 

broker, but others did not, those that knew would have a substantial information advantage in 

pricing their orders over those that did not. The proposed requirements would give originating 

brokers a choice on whether to disclose their identity, while at the same time promoting fair 

competition among auction responders and persons that could otherwise trade with the 

segmented order, both when such identity is disclosed and when it is not. Under Proposed Rule 

615(c)(1), (e)(3), and (f)(2), either all auction responders and persons that could otherwise trade 

with the segmented order would know the identity of the originating broker, or no auction 

responder or person that could otherwise trade with the segmented order would be permitted to 

know the identity of the originating broker. In either event, the fairness of qualified auctions 

would not be impacted. 

 

Proposed Rule 615(c)(2) specifies that the time period for a qualified auction must be no 

shorter than 100 milliseconds (1/10th of a second) and no longer than 300 milliseconds (3/10ths of 

a second) after an auction message is provided for dissemination in consolidated market data. 

The intent of these limits is to help ensure that a wide variety of market participants will have the 

technological capacity to submit responses to fast automated auctions, while also helping to 



112 

 

assure that the execution of segmented orders is not unduly delayed. Several national securities 

exchanges operate auctions that fall within these time periods, which indicates that the time 

periods are workable with technologies that currently are available to market participants (i.e., 

the fact that multiple national securities exchanges already operate auctions in these time frames 

indicates that market participants generally would be able to submit auction responses within the 

specified time periods).243 The Commission anticipates individual investors would manually 

submit to their brokers the great majority of segmented orders. Proposing to limit the auction 

length to no more than 300 milliseconds is designed to promote competition to obtain the best 

prices for segmented orders, but without a delay long enough to be inconsistent with an 

investor’s intent to trade immediately at the best available prices.  

Paragraph (c)(2) would further require that auction responses remain undisplayed during 

the time frame of the auction and not be disseminated thereafter. This proposed requirement is 

designed to prevent the market participants with the fastest systems from obtaining an advantage 

by observing the pricing of auction responses and submitting their auction responses near the end 

of the time period for the auction. It also is designed to prevent information leakage, both during 

auctions themselves and by analyzing historical auction data, concerning the trading interest of 

market participants, particularly institutional investors, that submit auction responses. 

 

Under Proposed Rule 615(c)(3), segmented orders and auction responses must be priced 

in an increment of no less than $0.001 (or 0.1 cent) if their prices are $1.00 or more per share, in 

                                                
243  See, e.g., Securities Exchange Act Release No. 91423 (Mar. 26, 2021), 86 FR 17230 (Apr. 1, 2021) (SR-

CboeBYX-2020-021) (order approving Cboe BYX’s proposed rule change for periodic auctions in NMS 

stocks with a 100 millisecond auction period); Nasdaq PHLX Rule 3, section 13(b)(1)(D) (providing that 
the time period for PHLX’s Price Improvement XL Mechanism (“PIXL”) auctions in listed options will be 

no less than 100 milliseconds and no more than one second). 



113 

 

an increment of no less than $0.0001 (or 0.01 cent) if their prices are less than $1.00 per share, or 

at the midpoint of the NBBO.  

These proposed increments are designed to balance the objectives of being sufficiently 

narrow to allow frequent price improvement for segmented orders (the wider the pricing 

increment, the greater the minimum amount of price improvement that is required, which could 

limit the frequency of price improvement), while being sufficiently wide to prevent market 

participants from attempting to gain execution priority by pricing their auction responses in very 

small increments. An analysis of current wholesaler trading in NMS stocks indicates that 18.64% 

of the price improved shares of wholesaler principal transactions received price improvement of 

less than 0.1 cent.244 Accordingly, the 0.1 cent price increment for qualified auctions would 

allow much of the existing price improvement to continue in qualified auctions. Moreover, as 

discussed in section IV.C.5 below, one of the prescribed execution priority requirements for 

qualified auctions in paragraph (c)(5) of Proposed Rule 615 is that the auction responses of 

customers, including institutional investors, would have priority over the auction responses of 

broker-dealers at the same price, thereby furthering the NMS objective of promoting direct 

interaction of investor orders without the participation of a dealer. A smaller pricing increment 

(such as 0.05 cent per share (or 1/20th of a cent per share) would allow more price improvement, 

but also would double the number of increments at which auction responses could be priced, 

which would enable execution priority advantages at the larger number of increments. The 

objective of promoting direct interaction of investor orders could be undermined if broker-

dealers with the most sophisticated algorithmic trading strategies could submit auction responses 

with very small pricing increments designed to obtain execution priority. 

                                                
244  Table 7, infra, section VII.B.4. 



114 

 

 

Proposed Rule 615(c)(4) sets forth a number of requirements that would govern the fees 

and rebates of open competition trading centers with respect to qualified auctions.245 In general, 

these requirements are designed to provide reasonable compensation for operating a qualified 

auction, while maximizing an opportunity for competitive forces to generate the best possible 

prices for segmented orders. Qualified auctions would be a new business line for open 

competition trading centers (both national securities exchanges and NMS Stock ATSs), which 

would provide them an opportunity to compete to attract the marketable orders of individual 

investors that, as discussed in section VII.B.2 below, are mostly routed to, and executed by, 

wholesalers in the current market structure. Accordingly, the proposed requirements for fees and 

rebates are designed to provide sufficient financial incentives for open competition trading 

centers to operate qualified auctions, but the primary objective of such requirements is to 

promote the regulatory objectives of Proposed Rule 615 — better prices for individual investors 

and an enhanced opportunity for investors to interact directly with the marketable orders of 

individual investors. 

First, no fee could be charged for submission or execution of a segmented order, or for 

submission of an auction response. Second, the fee for execution of an auction response could 

not exceed $0.0005 per share for auction responses priced at $1.00 per share or more, could not 

exceed 0.05% of the auction response price per share for auction responses priced at less than 

$1.00 per share, and otherwise would have to be the same rate for executed auction responses in 

all auctions. Third and similarly, any rebate for the submission or execution of a segmented order 

                                                
245  The Commission also is proposing to amend rules addressing fees and rebates more generally. See 

Minimum Pricing Increments Proposal, supra note 98. The Commission encourages commenters to review 

that proposal to determine whether it might affect their comments on this proposing release. 



115 

 

or for the submission or execution of an auction response could not exceed $0.0005 per share for 

segmented orders or auction responses priced at $1.00 per share or more, cannot exceed 0.05% 

of the segmented order or auction response price per share for segmented orders or auction 

responses priced at less than $1.00 per share, and otherwise must be the same rate for segmented 

orders in all auctions and must be the same rate for auction responses in all auctions. 

Proposed Rule 615 would prohibit fees for the submission or execution of segmented 

orders in a qualified auction. As discussed in section II above, the trading economics of 

executing segmented orders, particularly their low adverse selection costs, has led to a market 

structure where restricted competition trading centers generally do not charge fees to the broker-

dealers that route such orders and, indeed, often offer PFOF to retail brokers in return for routing 

such orders. With Proposed Rule 615, routing segmented orders to qualified auctions would 

often, absent an exception, be mandated by rule — a restricted competition trading center 

generally would be prohibited from executing a segmented order internally without first routing 

such order to a qualified auction. The Commission believes that broker-dealer compliance with a 

new rule requiring the routing of segmented orders to qualified auctions in certain circumstances 

should not lead to the imposition of fees by trading centers on broker-dealers that are not charged 

for the execution of such orders today. Instead, as discussed below, open competition trading 

centers could fund their operation of qualified auctions by imposing fees on auction responses 

that execute against segmented orders. In this respect, the market participants that benefit from 

the opportunity to trade with segmented orders, with their low adverse selection costs, would pay 

the open competition trading center for that trading service.  

With respect to auction responses, no fee could be charged for the submission of an 

auction response that is not executed. Such a practice potentially could be used to deter a wide 



116 

 

range of market participants from participating in qualified auctions and thereby dampen 

competition to provide the best prices for segmented orders. Fees could be charged for executed 

auction responses, consistent with the cap on such fees, which, for most NMS stocks, would be 

0.05 cent per share, also known as 5 “mils.” The proposed 5 mils cap on fees is designed to be 

sufficient to provide reasonable compensation to an open competition trading center. For 

example, an analysis of financial data for national securities exchanges indicates that average 

total net capture (the difference between fees levied and rebates paid) for such exchanges is 

currently around 4 mils for all trading types.246 Accordingly, the proposed 5 mils fee cap would 

provide a revenue source to fund qualified auctions that is consistent with their revenue to fund 

their other trading services, particularly their services during continuous trading hours.247 In 

addition, pursuant to Proposed Rule 615(c)(4), any fee charged for execution of an auction 

response must be the same rate for all auctions (i.e., an open competition trading center would 

not be permitted to charge different fees for auctions for different securities, nor would an open 

competition trading center be permitted to charge different fees to different market participants 

or different classes of market participants, such as preferential fees based on volume). This 

proposed uniform rate for fees is designed to promote a level playing field among all potential 

market participants that may wish to trade with segmented orders. It would, for example, prohibit 

any volume discount that could give the largest participants an economic advantage in pricing 

their auction responses compared to other market participants. The uniform rate also would 

                                                
246  See infra section VII.C.1.a (discussing effects of 5 mils cap on competition to supply liquidity to the 

marketable orders of individual investors). 

247  Id. (net capture for the executions of orders during continuous trading hours (but not opening or closing 

auctions) priced at $1.00 per share or greater is likely close to 2 mils). 



117 

 

prevent a fee discount for the executed auction response of a broker-dealer that routed the 

segmented order to the qualified auction. 

The proposed requirements for rebates mirror the requirements for fees in terms of the 5 

mils cap and the requirement of a uniform rate for all auctions. In particular, rebates could not 

exceed the maximum fee for qualified auctions. The equivalent proposed 5 mils cap on rebates is 

designed to limit cross-subsidization of qualified auctions by the largest open competition 

trading centers in ways that would not be available to smaller competitors, because larger 

competitors may have more or larger alternative revenue sources. The uniform rate of rebates for 

all auctions is designed, as with the uniform rate of fees, to level the playing field among larger 

and smaller broker-dealers. The proposed requirements for rebates differ from those for fees, 

however, in that open competition trading centers would have discretion on whether to offer 

rebates for the submission of segmented orders and of auction responses, as well as the execution 

of segmented orders and of auction responses. If such rebates were offered, however, they would 

have to be a uniform rate among all auctions to promote a level playing field and fair 

competition among broker-dealers and among auction responders. 

 

Proposed Rule 615(c)(5) would specify five requirements for the execution priority of 

auction responses and orders resting on the continuous order book of an open competition 

trading center, which can be divided into three categories. The first two would specify 

affirmative requirements for how priority among auction responses must be handled; the second 

two would specify negative requirements for how priority among auction responses cannot be 

handled; and the fifth requirement would address how qualified auctions must be integrated with 

a continuous order book operated by an open competition trading center. These five requirements 

would not exhaust all possible contexts for which additional priority rules may be needed, and, 



118 

 

as discussed below, open competition trading centers would have flexibility to develop 

additional priority rules as long as such rules are consistent with the requirements in Proposed 

Rule 615(c)(5). 

Pursuant to Proposed Rule 615(c)(5)(i), the first affirmative requirement would be price 

priority — the most favorable price for a segmented order would have priority of execution (the 

lowest priced auction response to a segmented order to buy and the highest priced auction 

response to a segmented order to sell). Price priority maximizes competitive incentives to obtain 

the best prices for segmented orders. 

Pursuant to Proposed Rule 615(c)(5)(ii), the second affirmative requirement would be 

customer priority. “Customer” is defined in Rule 600(b)(23) of Regulation NMS to mean any 

person that is not a broker-dealer. When two auction responses have the best price, and one is 

submitted for the account of a customer and one is submitted for the account of a broker-dealer, 

the customer’s auction response would be required to have priority. In such a case, the 

segmented order of an investor would interact directly with the auction response of another 

investor without the participation of a dealer, thereby promoting the NMS objective set forth in 

section 11A(a)(1)(C)(v) of the Exchange Act. 

Pursuant to Proposed Rule 615(c)(5)(iii), the first negative requirement for execution 

priority would be the prohibition of time priority, subject only to an auction response being 

received by an open competition trading center within the time period prescribed in paragraph 

(c)(2) of Proposed Rule 615. Prohibiting time priority for equally priced auction responses 

eliminates the incentive for a speed race that otherwise could reward market participants with 

resources to spend the most on sophisticated, low-latency trading systems and connectivity. 



119 

 

Pursuant to Proposed Rule 615(c)(5)(iv), the second negative requirement for execution 

priority would be a prohibition against favoring the broker-dealer that routed the segmented 

order to the auction, the originating broker for the segmented order, the open competition trading 

center operating the auction, or any affiliate of the foregoing persons.248 This requirement is 

designed to help maintain a level playing field among market participants submitting auction 

responses and thereby focus competition in the auctions on providing the best prices for 

segmented orders. Assigning priority to any firm associated with the handling of the orders or 

their affiliates would be one means for an open competition trading center to attempt to attract 

order flow by rewarding the firms that control such flow coming from the customer, which could 

undermine competition among auction responders to provide the best prices in qualified 

auctions. Given that Proposed Rule 615 would require segmented orders to be routed to qualified 

                                                
248  “Affiliate” is proposed to be defined in Proposed Rule 600(b)(3) of Regulation NMS to mean, with respect 

to a specified person, any person that, directly or indirectly, controls, is under common control with, or is 

controlled by, the specified person. “Control” is proposed to be defined in Proposed Rule 600(b)(23) of 

Regulation NMS to mean the power, directly or indirectly, to direct the management or policies of a broker, 

dealer, or open competition trading center, whether through ownership of securities, by contract, or 

otherwise. A person is presumed to control a broker, dealer, or open competition trading center if that 

person: (1) is a director, general partner, or officer exercising executive responsibility (or having similar 

status or performing similar functions); (2) directly or indirectly has the right to vote 25% or more of a 

class of voting securities or has the power to sell or direct the sale of 25% or more of a class of voting 

securities of the broker, dealer, or open competition trading center; or (3) in the case of a partnership, has 
contributed, or has the right to receive upon dissolution, 25% or more of the capital of the broker, dealer, or 

open competition trading center. Proposed Rule 600(b)(3) and Proposed Rule 600(b)(23). These definitions 

are substantially the same as the definitions of “affiliate” and “control” prescribed for purposes of an NMS 

Stock ATS’s disclosures about its operations on Form ATS-N with the following modifications: the Form 

ATS-N definition of “affiliate” uses a separately defined term “Person” instead of the statutory definition of 

“person,” and Form ATS-N defines “control” as applicable to the “broker-dealer of the alternative trading 

system” instead of as applicable to a “broker, dealer, or open competition trading center.” It is appropriate 

to use substantially similar definitions of “affiliate” and “control” in the context of Proposed Rule 615 

because, for purposes of Form ATS-N, the Commission defined such terms for use with respect to 

disclosures designed to enable market participants to better evaluate how relationships between certain 

persons could affect the handling of orders on a particular NMS Stock ATS. See ATS-N Adopting Release, 
supra note 159, 83 FR at 88318. The substantially similar proposed definitions, as used in the context of 

Proposed Rule 615, are similarly designed to recognize that relationships among certain persons may 

impact the handling of orders, and are designed to help ensure that the execution priority rules of an open 

competition trading center do not undermine full competition among auction responders in qualified 

auctions by favoring related parties that were involved in routing and executing the order at the open 

competition trading center. 



120 

 

auctions in some contexts, the competition among open competition trading centers to attract 

segmented orders should be focused on generating the best prices for investors. 

Finally, the execution priority requirements set forth in paragraph (c)(5)(v) of Proposed 

Rule 615 address how auction responses would be required to be integrated with the continuous 

order book of an open competition trading center. A continuous order book is proposed to be 

defined in Rule 600(b) of Regulation NMS as a system that allows orders for NMS stocks to be 

accepted and executed on a continuous basis.249 This definition would exclude single-priced 

auctions that are limited to a specified time, such as the opening and closing auctions of the 

primary listing exchanges, and that are not continuously available for trading based on the 

initiative of market participants or the open competition trading center. As discussed above, all 

open competition trading centers would operate as automated trading centers displaying 

automated quotations and therefore would have facilities in which orders from market 

participants are accepted and executed on a continuous basis.  

The proposed execution priority requirements primarily are designed to balance the 

objectives of obtaining the best prices for segmented orders and maintaining fair competition 

both in qualified auctions and on continuous order books.250 The first such requirement is that 

orders resting on the continuous order book of the open competition trading center operating the 

qualified auction, whether displayed or undisplayed, would have priority over auction responses 

                                                
249  Proposed Rule 600(b)(22). 

250  Trades executed in qualified auctions would not qualify for an exception from the trade-through 

requirements of Rule 611 of Regulation NMS, which are discussed in section III above. Accordingly, if a 

qualified auction did not generate a price that was at or within the best-priced protected quotations, the 

open competition trading center would, absent an exception, be prohibited by Rule 611 from executing the 

segmented order. If a restricted competition trading center subsequently decided to execute such segmented 

order, it would need, absent an exception, to comply both with the trade-through requirements of Rule 611 

and with Proposed Rule 615(a) by immediately executing the segmented order at a price that was equal to 

or better for the segmented order than the specified limit price in the qualified auction.121 

 

at a less favorable price for the segmented order. This is another application of the principle of 

price priority that underlies proposed paragraph (c)(5)(i). 

The second requirement is that displayed orders resting on the continuous order book 

would be required to have priority at the same price over auction responses, while, in turn, 

auction responses would be required to have priority at the same price over undisplayed orders 

resting on the continuous order book. Rewarding the display of orders serves the purpose of 

promoting public price transparency, consistent with the NMS objective in section 

11A(a)(1)(C)(iii) of the Exchange Act. As between undisplayed orders and auction responses, 

however, giving priority to auction responses at the same price would encourage participation in 

qualified auctions, thereby promoting the core order competition objective of Proposed Rule 615. 

Moreover, unlike displayed orders that can be executed immediately because they present a 

known opportunity to trade for market participants, undisplayed orders on continuous order 

books are not known to other market participants and potentially create a risk of gaming 

behavior by broker-dealers with knowledge of segmented orders that could undermine 

competition in qualified auctions. As discussed in section IV.F below, this potential gaming 

behavior is prohibited in paragraph (f) of Proposed Rule 615. Assigning priority to auction 

responses over undisplayed orders at the same price would help address the root incentives for 

such behavior. 

While Proposed Rule 615(c) sets forth a series of execution priority requirements for 

qualified auctions, open competition trading centers also would have flexibility to develop 

additional execution priority rules for their auction mechanism, as long as they were consistent 

with the proposed requirements. As one example, Proposed Rule 615(c) does not prescribe 

execution priority when an open competition trading center receives multiple best priced 



122 

 

responses for the account of customers because multiple possibilities would be consistent with 

the objectives of Proposed Rule 615. An open competition trading center would be free to 

develop rules for assigning execution priority among such customer responses, as long as they 

were consistent with Proposed Rule 615(c).251  

Moreover, Proposed Rule 615 allows flexibility for open competition trading centers in a 

variety of other contexts. For example, it does not specify whether an open competition trading 

center may or may not simultaneously operate multiple qualified auctions for the same NMS 

stock, and if so, the execution priority required for auction responses across such auctions. 

Proposed Rule 615 also would not impose requirements for auction responses, other than the 

requirement in paragraph (c)(1) that an auction message initiating a qualified auction would be 

required to invite “priced” auction responses. 

D. Open Competition Trading Center Requirements 

Paragraph (d) of Proposed Rule 615 sets forth requirements for national securities 

exchanges and NMS Stock ATSs that intend to act as open competition trading centers that 

operate qualified auctions for segmented orders. First, it would prohibit a national securities 

exchange or NMS Stock ATS from operating a qualified auction unless the exchange or ATS 

meets the definition of open competition trading center and complies with the provisions of 

Proposed Rule 615 for qualified auctions, which were discussed in section IV.B.2 and IV.C 

above. Second, it would prohibit an open competition trading center from operating a system, 

other than a qualified auction, that is limited in whole or in part to the execution of segmented 

orders, unless any segmented order executed through the system meets requirements that parallel 

                                                
251  As discussed above in section IV.B.2, national securities exchanges must file proposed rules with the 

Commission to reflect material changes in their rules, while NMS Stock ATSs must update their Form 

ATS-Ns to reflect material changes in their rules. 



123 

 

those specified for an exception in paragraph (b) of Proposed Rule 615.252 This proposed 

prohibition is identical to the prohibition in paragraph (g) of Proposed Rule 615 that would apply 

to all national securities exchanges, regardless of whether they meet the definition of an open 

competition trading center, and is discussed further in section V.G below. 

E. Originating Broker Requirements 

Paragraph (e) of Proposed Rule 615 sets forth three requirements for originating brokers. 

First, an originating broker would be required to establish, maintain, and enforce written policies 

and procedures reasonably designed to identify the orders of customers as segmented orders. 

Given that the order competition requirement of paragraph (a) would apply solely to segmented 

orders, it is imperative that customer orders be properly identified as such by the originating 

broker, which will have the knowledge of its customer accounts necessary to make such 

identification. As discussed above in section IV.B.1, the first part of the proposed definition of 

segmented order relating to the nature of the account is based on existing SRO rules and, 

accordingly, is designed to facilitate ease of compliance by originating brokers. The second part 

                                                
252  Proposed Rule 615(b); Proposed Rule 615(d)(2)(i) through (v). Specifically, a segmented order executed 

through such system of an open competition trading center would be required to: (1) be received and 

executed during a time period when no open competition trading center is operating a qualified auction for 

the segmented order; (2) have a market value of at least $200,000 calculated with reference to the midpoint 

of the NBBO when the segmented order was received by the open competition trading center; (3) be 

executed by the open competition trading center at a price that is equal to or more favorable for the 

segmented order than the midpoint of the NBBO when the segmented order was received by the open 

competition trading center; (4) be a limit order with a limit price selected by the customer that is equal to or 

more favorable for the segmented order than the midpoint of the national best bid and national best offer 
when the segmented order is received by the open competition trading center; or (5) be received and 

executed by the open competition trading center during a time period when no open competition trading 

center is operating a qualified auction for the segmented order that accepts orders that are not entirely in 

whole shares, and be a size, selected by the customer, that is not entirely in whole shares of an NMS stock, 

in which case any portion of such segmented order that is less than one whole share of the NMS stock, and 

only such portion, may be executed through such system. 



124 

 

of the proposed definition relating to frequency of trading in an account would be based on 

customer trading information that originating brokers are required to maintain.253 

Second, an originating broker would be prohibited from routing a customer order 

identified as a segmented order without also identifying the order to the routing destination as a 

segmented order.254 This requirement would work together with an analogous requirement in 

paragraph (f) of Proposed Rule 615 for all broker-dealers that route segmented orders that is 

discussed in section IV.F below. Together, the proposed requirements are designed to ensure that 

a segmented order continues to be identified as such throughout the routing chain from 

origination through execution. Proper marking of segmented orders would be essential for a 

restricted competition trading center to know that it must comply with the order competition 

requirement of paragraph (a). The proposed identification requirements of paragraph (e) for 

originating brokers and paragraph (f) for all broker-dealers are designed to assure that no 

segmented order reaches a restricted competition trading center without the proper identification. 

If there is more than one originating broker for a segmented order, the broker that carries the 

individual investor’s customer account would likely be the originating broker that maintains the 

policies and procedures to identify segmented orders as such, as well as identifies and marks the 

orders.  

                                                
253  See 17 CFR 240.17a-3(a) (requiring broker-dealers to make and keep, among other things, current blotters 

containing an itemized daily record of all purchases and sales of securities and the account for which each 

such purchase and sale was effected). 

254  17 CFR 242.613 (Rule 613 of Regulation NMS) requires each national securities exchange and national 

securities association to jointly file an NMS plan governing the creation, implementation, and maintenance 

of a consolidated audit trail (“CAT”) which is reported to a central repository. The rule specifies the type of 

data to be collected and reported. Pursuant to Rule 613(c)(7), any CAT plan participant or broker-dealer 

that receives, originates, or handles orders in NMS stocks must report certain information regarding those 

orders, including the “material terms” of each order. Rule 613(j)(7) defines “material terms of an order” to 
include “any special handling instructions.” Because Proposed Rule 615 would mandate special handling 

for segmented orders, the identification of the order as a segmented order, any exceptions applicable to its 

handling, and the identity of the originating broker or an indication of a certification of anonymity would 

be required by current Rule 613 to be reported as material terms in each event in the lifecycle. 



125 

 

Third, an originating broker that makes the certification referred to in paragraph 

(c)(1)(iii) of Proposed Rule 615 would be required to establish, maintain, and enforce written 

policies and procedures reasonably designed to assure that the identity of the originating broker 

will not be disclosed, directly or indirectly, to any person that potentially could participate in the 

qualified auction or otherwise trade with the segmented order. As discussed in section IV.C.1 

above, knowing the identity of an originating broker could provide a significant information 

advantage to a market participant when pricing an auction response if other market participants 

did not have this information. The effect of the certification referred to in paragraph (c)(1)(iii) of 

Proposed Rule 615 would be that either all responders in a qualified auction would know the 

identity of the originating broker (if the certification is not made) or no responders in a qualified 

auction would know the identity of the originating broker (if the certification is made). In the 

absence of an appropriate certification from an originating broker, an open competition trading 

center would be required to identify the originating broker in the auction message disseminated 

in consolidated market data. The “written policies and procedures” requirement of proposed 

paragraph (e)(3) specifies the responsibility of an originating broker in making such a 

certification. As one potential example of such policies and procedures, an originating broker 

could provide that such originating broker will route all the segmented orders of its customers 

directly to an open competition trading center for a qualified auction, without disclosing the 

existence of such orders to any other person. Another potential example would be for the 

originating broker to use a single broker for routing segmented orders to open competition 

trading centers for qualified auctions, and the single executing broker represents in writing that it 

will not participate in any qualified auction for the segmented orders or otherwise trade with the 



126 

 

segmented orders, and that it will not disclose the existence of such segmented orders to any 

other person. 

As mentioned in section IV.B.4 above, broker business practices can vary in terms of 

how customer accounts are handled, and there may be multiple originating brokers for a 

segmented order. In addition, such brokers currently enter into agreements with one another to 

allocate certain responsibilities with respect to the handling of customer accounts, such as those 

referred to as carrying agreements. The Commission has designed Proposed Rule 615 to preserve 

brokers’ existing flexibility to allocate responsibilities among themselves. Accordingly, 

paragraph (e)(4) of Proposed Rule 615 provides that, where there are multiple originating 

brokers for a segmented order, an originating broker shall not be deemed to be in violation of the 

provisions of paragraph (e)(1) through (3) arising solely from a failure to meet a responsibility 

that was specifically allocated by prior written agreement to another originating broker. 

F. Broker-Dealer Requirements 

Paragraph (f) of Proposed Rule 615 sets forth two requirements for all broker-dealers 

with respect to segmented orders. First, pursuant to proposed paragraph (f)(1), a broker-dealer 

that receives an order identified as a segmented order would be prohibited from routing such 

order without identifying the order to the routing destination as a segmented order. As discussed 

in section IV.E above, this requirement is designed to work together with an analogous 

requirement for originating brokers to help assure that no segmented order reaches a restricted 

competition trading center, even if routed through multiple broker-dealers or trading centers, 

without being properly identified as a segmented order. 

Second, paragraph (f)(2) of Proposed Rule 615 sets forth a requirement for all broker-

dealers, which includes originating brokers, that is designed to prevent gaming behavior that 



127 

 

could undermine fair competition in qualified auctions and on continuous order books. In 

particular, it would prohibit a broker-dealer with knowledge of where a segmented order is to be 

routed from submitting an order, or enabling an order to be submitted by any other person, to the 

continuous order book of an open competition trading center or of a national securities exchange 

that could have priority to trade with the segmented order at such open competition trading 

center or national securities exchange. 

The prohibition of paragraph (f)(2) is designed to address two types of potential gaming 

behavior by broker-dealers. First, absent this proposed prohibition, a broker-dealer with 

knowledge that a segmented order is to be routed to a qualified auction could submit, or enable 

another person to submit (such as by providing information to another person), to the open 

competition trading center conducting such auction a displayed contra-side order that was priced 

at or better than the specified limit price of the segmented order. As discussed in section IV.C 

above, displayed orders on the continuous order book of an open competition trading center 

could have priority to trade with a segmented order ahead of equally priced auction responses. 

The submission of contra-side orders to a continuous order book to avoid participating in a 

qualified auction, however, could undermine fair competition in the qualified auction and 

therefore would be prohibited by paragraph (f)(2). 

A second type of gaming behavior prohibited by paragraph (f)(2) of Proposed Rule 615 

relates to segmented orders that are not routed to qualified auctions, but rather to a continuous 

order book of an open competition trading center or a national securities exchange. As stated in 

section IV.A above, the order competition requirement of paragraph (a) of Proposed Rule 615 

does not apply to an open competition trading center or to a national securities exchange, 

regardless of whether such exchange is an open competition trading center, and therefore, a 



128 

 

broker-dealer could route a segmented order directly to an open competition trading center or a 

national securities exchange.255 However, there remains an incentive for a broker-dealer to seek 

to trade with a segmented order outside of the fair competition of a qualified auction by 

submitting a contra-side order at the same time it submits the segmented order (i.e., a “paired 

order”) to a continuous order book of an open competition trading center or national securities 

exchange with the expectation of executing against the segmented order. Paragraph (f)(2) is 

designed to address this potential by prohibiting a broker-dealer with knowledge of where a 

segmented order is to be routed from submitting, or enabling any other person to submit (such as 

by providing information to another person), an order to an open competition trading center or a 

national securities exchange that could have priority to trade with the segmented order. 

In addition to the requirements for broker-dealers set forth in Proposed Rule 615, all 

other existing obligations of broker-dealers for customer orders, including best execution 

discussed in section III.B above, would continue to apply. For example, an important 

consideration for broker-dealers in handling a segmented order would be the relative 

performance of qualified auctions at different open competition trading centers in terms of their 

order execution quality. Broker-dealers with best execution responsibilities for segmented orders 

generally should consider the available information on execution quality for segmented orders at 

different qualified auctions. To provide broker-dealers with relevant information on qualified 

auctions, if Proposed Rule 615 is adopted, the effective NMS plans for NMS stocks would need 

                                                
255  As discussed elsewhere in this release, both of these types of trading centers are subject to rigorous 

requirements for access and competition, and they therefore would not be prohibited from executing a 

segmented order without it being submitted to a qualified auction. In addition to the applicable proposed 

requirements under Proposed Rule 615, a broker-dealer still would be required to satisfy its best execution 

responsibilities if bypassing a qualified auction and routing a segmented order directly to an open 

competition trading center or a national securities exchange. 



129 

 

to be conformed to provide for the collection and dissemination of a sale condition in transaction 

reports for national securities exchanges and NMS Stock ATSs indicating that the transaction 

was executed in a qualified auction under Proposed Rule 615(c).256 

G. National Securities Exchange Requirements 

Exchanges are excluded from the proposed definition of a restricted competition trading 

center because, as discussed in section III.B above, they are subject to the extensive Exchange 

Act requirements for access and competition. Accordingly, the order competition requirement of 

paragraph (a) of Proposed Rule 615 does not apply to a national securities exchange, regardless 

of whether such exchange meets the definition of an open competition trading center. To the 

extent consistent with their best execution responsibilities, broker-dealers would be permitted to 

route segmented orders directly to any national securities exchange without first routing the 

order to a qualified auction. One potential example of when such a direct route could be 

consistent with best execution is a fast market when prices are moving rapidly away from a 

segmented order (prices increasing for buy orders and prices decreasing for sell orders). In this 

example, a broker-dealer could determine that obtaining a better price in a qualified auction than 

a displayed quotation is unlikely, and the broker-dealer could route a segmented order directly to 

execute against the best available price available at a national securities exchange or an open 

competition trading center. Competition in qualified auctions, however, could be undermined if 

national securities exchanges and open competition trading centers were permitted to siphon 

segmented order flow away from qualified auctions by operating trading mechanisms that were 

limited, in whole or in part, to segmented orders.  

                                                
256  The technical specifications of the NMS plans for disseminating consolidated market data include sale 

condition modifiers for trade reports that specify various types of trades, including some auction trades. 



130 

 

Accordingly, paragraphs (d)(2) (as discussed above) and (g) of Proposed Rule 615 would 

prohibit all open competition trading centers and national securities exchanges from operating a 

system, other than a qualified auction, that is limited, in whole or in part, to the execution of 

segmented orders, unless any segmented order executed through such system qualifies for 

exceptions that are the same as those in Proposed Rule 615(b).257 This prohibition would apply to 

many of the RLPs currently operated by national securities exchanges.258 An example of a 

trading system that would not be prohibited under paragraphs (d)(2) and (g), however, would be 

one that is limited to the execution of segmented orders at prices equal to the NBBO midpoint, 

which would qualify for the exception in Proposed Rule 615(g)(3).259 

                                                
257  Proposed Rule 615(b); Proposed Rule 615(d)(2)(i) through (v); Proposed Rule 615(g)(1) through (5); and 

supra note 252 and accompanying text. Specifically, a segmented order executed through such system of a 

national securities exchange would be required to: (1) be received during a time period when no open 

competition trading center is operating a qualified auction for the segmented order; (2) have a market value 

of at least $200,000 calculated with reference to the midpoint of the NBBO when the segmented order was 

received by the national securities exchange; (3) be executed by the national securities exchange at a price 

that is equal to or more favorable for the segmented order than the midpoint of the NBBO when the 

segmented order was received by the national securities exchange; (4) be a limit order with a limit price 

selected by the customer that is equal to or more favorable for the segmented order than the midpoint of the 

national best bid and national best offer when the segmented order is received by the national securities 
exchange; or (5) be received and executed by the national securities exchange during a time period when no 

open competition trading center is operating a qualified auction for the segmented order that accepts orders 

that are not entirely in whole shares, and be a size, selected by the customer, that is not entirely in whole 

shares of an NMS stock, in which case any portion of such segmented order that is less than one whole 

share of the NMS stock, and only such portion, may be executed through such system. 

258  As discussed in section III.B.2.c, RLPs are exchange trading mechanisms limited to retail orders, as defined 

in the exchanges’ rules. 

259  IEX’s RLP, for example, only permits retail liquidity provider orders to be midpoint peg orders. See 

Securities Exchange Act Release No. 93217 (Sep. 30, 2021), 86 FR 55663 (Oct. 6, 2021) (order approving 

an exemption from Rule 602 of Regulation NMS for IEX’s retail price improvement program and 

describing that IEX’s program is different because retail liquidity provider orders can only be midpoint peg 
orders); IEX Rules 11.190(b)(14) (Retail Liquidity Provider Order) and 11.232 (Retail Price Improvement 

Program). IEX has rules that will also permit orders in its RLP to be executed at prices better than the 

NBBO midpoint. See Securities Exchange Act Release No. 94884 (May 10, 2022), 87 FR 29768 (May 16, 

2022) (SR-IEX-2022-04). 



131 

 

V. Request for Comment 

The Commission generally requests comment from the public on all aspects of Proposed 

Rule 615, including its objectives and its terms to achieve those objectives. The Commission also 

generally requests comment on the proposed definitions to be added to Rule 600 and their use in 

the context of Proposed Rule 615. More specific requests for comment are set forth below. With 

respect to any comments, the Commission notes that they are of the greatest assistance to this 

rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in 

those comments.  

1. The Commission requests comment on the operation and effectiveness of Proposed 

Rule 615. Would exposing segmented orders to competition in qualified auctions be 

likely to generate better prices for individual investors than are provided by current 

broker-dealer routing practices? Would the likelihood of better prices vary across 

different types of NMS stocks, such as those with different levels of liquidity and 

trading volume? Do commenters believe that the wide dissemination of auction 

messages for qualified auctions in NMS stocks would be likely to affect trading or 

quoting behavior in NMS stocks during the time period of the auction and, if so, 

would such an effect promote or detract from obtaining the best possible price for 

segmented orders in the qualified auctions? 

2. Proposed Rule 615(c)(2) would prohibit display of auction responses. In the case of 

an execution in a qualified auction, a transaction report maintaining the anonymity of 

the parties would be displayed in consolidated market data. Does the proposed 

prohibition sufficiently mitigate the possibility of information leakage for participants 

in a qualified auction? Are there different or additional requirements that would better 

mitigate the possibility of information leakage? 



132 

 

3. Is focusing on the accounts of natural persons, as well as accounts held in legal form 

on behalf of a natural person or group of related family members, and the level of 

trading activity in such accounts an appropriate approach to identify orders that are 

included, and those that are excluded, from the proposed definition of a segmented 

order?  

4. Should the proposed definition of “group of related family members” be more or less 

inclusive, and if so, in what regard?  

5. Should the level of trading activity used to determine which accounts are associated 

with segmented orders be lower or higher than 40 trades per day? Is the six-month 

time frame is appropriate? If other metrics would be more appropriate, please explain 

why and, if possible, provide data to support your position. 

6. Should any large orders be entirely excluded from the definition of segmented order 

and therefore not eligible to trade in qualified auctions, as opposed to the rule 

proposal which would provide an exception for orders of $200,000 or more and that 

allows a choice of whether to submit such orders to qualified auctions? 

7. The proposed definition of an open competition trading center would require national 

securities exchanges to operate as an SRO trading facility that is an automated trading 

center and displays automated quotations that are disseminated in consolidated 

market data? Is this requirement appropriate or should it be modified in any respect? 

8. Is requiring a minimum level of trading volume for national securities exchanges to 

qualify as open trading competition centers an appropriate means to achieve the 

objectives of Proposed Rule 615? If so, should the 1% level should be lower or 

higher? For example, should the 1% level be lowered to enable additional national 



133 

 

securities exchanges to compete for segmented orders by operating qualified auctions, 

or should the 1% be increased to help limit the potential costs of market 

fragmentation? Are the other parameters of the volume threshold appropriate to 

achieve the objective of ensuring that qualified auctions are offered by trading centers 

that have sufficient volume to provide vigorous competition? Is average daily volume 

during at least 4 of the preceding 6 calendar months an appropriate parameter, or are 

there more appropriate parameters? Is there another approach that would be more 

effective to help limit the potential costs of market fragmentation that could be 

associated with the requirements of Proposed Rule 615?  

9. Under the proposal, national securities exchanges would be required to operate 

pursuant to their own rules providing that such exchanges would comply with the 

requirements for qualified auctions. Would this requirement provide sufficient notice 

to market participants concerning the operation of qualified auctions by national 

securities exchanges? 

10. Should an NMS Stock ATS, to meet the proposed definition of an open competition 

trading center, be required to display quotes through an SRO display-only facility? 

Also, should an NMS Stock ATS be required to operate as an automated trading 

center and display automated quotations that are disseminated in consolidated market 

data?  

11. Do commenters believe that identifying an NMS Stock ATS as the venue of 

execution in transaction reports that are disseminated in consolidated market data 

would be helpful to market participants when assessing qualified auctions?  



134 

 

12. Should an NMS Stock ATS be required to permit any registered broker-dealer to 

become a subscriber, except for a broker-dealer that is subject to a statutory 

disqualification or, pursuant to written policies and procedures, does not meet 

standards of financial responsibility or operational capability? 

13. Is an equal access standard appropriate for NMS Stock ATSs to meet the definition of 

an open competition trading center and operate qualified auctions? Alternatively, 

should other approaches be used to achieve the objective of a level playing field 

regarding Proposed Rule 615 between NMS Stock ATSs and national securities 

exchanges, given their different statutory and regulatory regimes? For example, 

should the existing fair access requirement in Rule 301(b)(5) of Regulation ATS be 

used instead of the proposed equal access requirement? Are there other aspects of 

access to an NMS Stock ATS operating as an open competition trading center 

offering qualified auctions that should be addressed by Proposed Rule 615? 

14. Is requiring a minimum level of trading volume for NMS Stock ATSs an appropriate 

means to achieve the objectives of Proposed Rule 615? If so, should the 1% volume 

threshold should be lower or higher? Are the other parameters of the volume 

threshold appropriate to achieve the objective of ensuring that qualified auctions are 

offered by trading centers that have sufficient volume to provide vigorous 

competition? Is average daily volume during at least 4 of the preceding 6 calendar 

months an appropriate parameter, or are there more appropriate parameters? Is there 

another approach that would be more effective to help limit the potential costs of 

market fragmentation that could be associated with the requirements of Proposed 

Rule 615? 



135 

 

15. Would market participants have sufficient notice concerning the operation of 

qualified auctions by NMS Stock ATSs if they operate pursuant to an effective Form 

ATS-N that evidences compliance with the requirements for a qualified auction in 

Proposed Rule 615(c) and with the other provisions of the proposed definition of an 

open competition trading center? 

16. Are there any other requirements, beyond those specified in the proposed definition 

of an open competition trading center, that national securities exchanges or NMS 

Stock ATSs should meet to be eligible to qualify as open competition trading centers 

and operate qualified auctions? 

17. Should national securities exchanges that do not meet the proposed definition of an 

open competition trading center be excluded, as proposed, from the definition of a 

restricted competition trading center based on their statutory requirements relating to 

access and competition? 

18. Does the proposed definition of originating broker appropriately capture the brokers 

that would make the determination of whether an order falls within the definition of a 

segmented order, as well as the broker that would be required to be identified in 

auction messages? Instead of allowing originating brokers to choose whether to be 

identified in auction messages, should Proposed Rule 615, as a means to promote 

greater uniformity of execution quality for segmented orders from different 

originating brokers, prohibit any identification of the originating broker in auction 

messages and require originating brokers to certify that their identity will not be 

disclosed for all segmented orders? Should originating brokers for a segmented order, 

other than the broker responsible for approving the opening of accounts with 



136 

 

customers, be identified in the auction message? Should carrying or clearing brokers 

that are an originating broker for a segmented order also be disclosed in an auction 

message? Would such information be useful to market participants’ decisions whether 

to submit auction responses and at what prices? 

19. Are the five proposed exceptions in paragraph (b) of Proposed Rule 615 appropriate? 

Should additional exceptions be included, such as an exception for orders directed by 

the customer to a particular trading center?  

20. Instead of providing an exception for executions of segmented orders during a time 

period when no open competition trading center is operating a qualified auction, 

should the execution of segmented orders during such a time period be prohibited? Is 

market value an appropriate approach to identifying large trades that should be 

excepted from Proposed Rule 615? If so, should the threshold amount of $200,000 be 

lower or higher? For example, do commenters believe that segmented orders in NMS 

stocks with a market value of up to $200,000 could be executed efficiently in 

qualified auctions at prices that mostly would be at or within the NBBO? If not, what 

market value should be used to achieve this objective and should it vary based on the 

trading characteristics of a particular NMS stock? 

21. Would it be appropriate for Proposed Rule 615(b) to include an exception for 

executions at a price less favorable to the segmented order than a midpoint execution, 

so long as the segmented order is executed at a price with a specified amount of price 

improvement? If so, what would be the appropriate level of price improvement?  

22. Is it appropriate for Proposed Rule 615(b) to include an exception for executions of a 

segmented order with a limit price selected by the customer that is equal to or more 



137 

 

favorable for the segmented order than the midpoint of the national best bid and 

national best offer when the segmented order is received by the restricted competition 

trading center? Should there be an exception for a wider range of limit orders, in 

addition to, or instead of this proposed exception? For example, should there be an 

exception for all non-marketable limit orders (i.e., any buy limit order with a price 

less than the NBO and any sell limit order with a price greater than the NBB)?  

23. Is it appropriate for Proposed Rule 615(b) to include the exception for executions of 

segmented orders where no qualified auctions are being offered for orders that are not 

entirely in whole shares, and the customer selected a size for a segmented order that is 

not entirely in whole shares of an NMS stock, in which case any portion of such 

segmented order that is less than one whole share of the NMS stock, and only such 

portion, would not be subject to the order competition requirement of paragraph (a) of 

Proposed Rule 615? Would a broker-dealer’s best execution responsibilities be 

sufficient to ensure that the fractional portion of the segmented order is executed in 

the best market available? Do commenters believe that, if Proposed Rule 615 were 

adopted, open competition trading centers would offer qualified auctions that 

accommodate fractional shares? If not, should a broker-dealer be required to round up 

a segmented order with a fractional component before submitting the order to a 

qualified auction, with the broker-dealer required to accept the rounded up portion of 

the order? Or would broker-dealers be less willing to offer their customers 

transactions in fractional shares if rounding up were required? 

24. Should auction messages be required to include the side (buy or sell) of a segmented 

order? For example, if side were not included in auction messages, market 



138 

 

participants could be allowed to provide auction responses for one or both sides, with 

only auction responses on the opposite side of the segmented order considered for 

execution. Do commenters believe that such an approach would limit the extent to 

which quoted price might move away from segmented orders during the pendency of 

a qualified auction? 

25. Should the minimum or maximum time periods for qualified auctions be shorter or 

longer? Should a restricted competition trading center be permitted to execute a 

segmented order that was not executed in a qualified auction at the specified limit 

price as soon as reasonably possible, or should there be a specified time period for 

execution? 

26. Should the pricing increment be smaller or larger than the proposed 0.1 cent for 

segmented orders and auction responses with prices of $1.00 or more per share? 

Would, for example, the potential benefit for segmented orders of a smaller pricing 

increment, such as 0.05 cent, outweigh the potential cost of less direct interaction of 

investor orders without the participation of a dealer?  

27. Does Proposed Rule 615(c)(4) appropriately address the fees and rebates for qualified 

auctions? Is the proposed prohibition of any fee for the submission or execution of 

segmented orders appropriate? Should the proposed 5 mil cap on fees for executed 

auction responses priced at $1.00 per share or more be higher or lower? Should the 

proposed 5 mil cap on rebates for segmented orders priced at $1.00 per share or more 

be higher or lower? Is it appropriate to require that the rates for fees and rebates be 

flat in all auctions? 



139 

 

28. Are the execution priority requirements specified in Proposed Rule 615(c)(5) 

appropriate? Should auction responses of customers have priority over auction 

responses of broker-dealers at the same price? Is it appropriate to prohibit execution 

priority terms that favor the broker-dealer that routed the segmented order, the 

originating broker for the segmented order, and the open competition trading center 

operating the auction, as well as affiliates of the foregoing persons? Should the 

requirements for execution priority of orders resting on the continuous order book of 

an open competition trading center be modified? Should displayed orders on the 

continuous order book have priority over auction responses at the same price? Should 

auction responses have priority over undisplayed orders on the continuous order book 

at the same price? 

29. Should an open competition trading center be permitted to give execution priority 

advantages to market makers that accept objective affirmative obligations, such as 

public quoting obligations or an obligation to fill segmented orders at the relevant 

NBBO if such orders do not otherwise receive an execution in qualified auctions? For 

example, Table 7 in section VII.B.4 below shows that 1.67% of marketable order 

shares are executed by wholesalers at prices outside the NBBO at the time the 

wholesaler received the order. Do commenters believe that, if Rule 615 were adopted 

as proposed, a larger percentage of marketable orders of individual investors would 

be executed at prices outside the NBBO when the order is received by a trading 

center? 



140 

 

30. Should the broker routing a segmented order to a qualified auction be required to 

execute the order, or any unexecuted portion thereof, at the specified limit price or 

some other price if the segmented order is not executed in full in the auction? 

31. Should there be parameters for what the specified limit price selected by a broker 

routing a segmented order to a qualified auction could be? For example, should the 

specified limit price be required to be within a range that is tied to the midpoint of the 

NBBO at the time the segmented order is received? 

32. Should an open competition trading center be permitted to operate multiple qualified 

auctions in the same NMS stock simultaneously? 

33. Should open competition trading centers have flexibility to determine aspects of 

qualified auctions that are not specified by Proposed Rule 615? Are there additional 

aspects for qualified auctions that should be specified by rule? For example, are there 

additional aspects of execution priority that should be specified by rule or, 

alternatively, that open competition trading centers should have greater flexibility to 

determine?  

34. Should open competition trading centers and national securities exchanges be allowed 

to continue to operate trading systems, other than qualified auctions, that are limited, 

in whole or in part, to the execution of segmented orders and that do not fall within 

one of the five exceptions in Proposed Rule 615(d)(2) and (g)? For example, should 

national securities exchanges be permitted to continue to operate RLPs that do not 

qualify for one of the exceptions in Proposed Rule 615(g)? Are there other types of 

limited trading facilities operated by national securities exchanges or open 

competition trading centers that should be permitted?141 

 

35. Is it appropriate, as provided in Proposed Rule 615(f)(4), to prohibit broker-dealers 

with knowledge of where a segmented order is to be routed for execution from 

submitting, or enabling the submission, of an order to the continuous order book of an 

open competition trading center that could trade with that segmented order? Do 

commenters believe that this prohibition could significantly interfere with broker-

dealer handling of customer orders and, if so, would limiting the prohibition to the 

proprietary orders of a broker-dealer and its affiliates be consistent with the purposes 

of Proposed Rule 615? 

36. Does Proposed Rule 615(e)(4) provide sufficient clarification as to which broker-

dealer would be subject to the obligations of Proposed Rule 615(e) when there are 

multiple originating brokers for a segmented order and such originating brokers have 

in place a written agreement that allocates their responsibilities with respect to 

customer orders? 

37. Does Rule 613 of Regulation NMS and the Consolidated Audit Trail NMS Plan 

require adequate reporting of all elements of this proposed rule so that regulators can 

evaluate compliance and study its effectiveness?260 

VI. Paperwork Reduction Act Analysis 

Certain provisions of Proposed Rule 615 contain “collection of information” 

requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).261 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. An 

                                                
260  See supra note 254 (discussing the type of data to be collected and reported pursuant to the CAT NMS 

Plan). 

261  44 U.S.C. 3501 et seq. 



142 

 

agency may not conduct or sponsor, and a person is not required to respond to, a collection of 

information unless the agency displays a currently valid control number. The title of the new 

collection of information is “Order Competition Rule.” The requirements of this collection of 

information would be mandatory for originating brokers, brokers and dealers that route 

segmented orders, national securities exchanges and NMS Stock ATSs that operate qualified 

auctions as open competition trading centers, and national securities associations that provide 

auction message information for dissemination in consolidated market data. 

A. Summary of Collection of Information 

Proposed Rule 615 and the proposed related amendments would create burdens under the 

PRA by creating the new collections of information described below for market participants that 

handle or execute segmented orders, or operate qualified auctions to provide competition for 

segmented orders.  

 

Proposed Rule 615 would require an open competition trading center to comply with the 

requirements of paragraph (c) for operation of a qualified auction for segmented orders.262 

Pursuant to paragraph (c)(1), an open competition trading center operating a qualified auction 

would be required to provide an auction message announcing the initiation of a qualified auction 

for a segmented order for dissemination in consolidated market data. Each auction message shall 

invite priced auction responses to trade with a segmented order and shall include, among other 

things, the identity of the originating broker.263  

                                                
262  Supra section IV.C. 

263  As discussed above in section IV.C.1, the identity of the originating broker is not required to be disclosed, 

however, if the originating broker makes the requisite certification.  



143 

 

 

 

Paragraph (e)(1) would require originating brokers to establish, maintain, and enforce 

written policies and procedures reasonably designed to identify the orders of customers as 

segmented orders.  

 

Paragraph (e)(2) of Proposed Rule 615 would require originating brokers to identify a 

segmented order as such to any destination the broker routes the order. Additionally, pursuant to 

paragraph (f)(1) of Proposed Rule 615, no broker-dealer that receives an order identified as a 

segmented order shall route the order without identifying the order as a segmented order to the 

routing destination. Thus, originating brokers and other broker-dealers that route segmented 

orders would be required to mark segmented orders as such.  

 

Pursuant to paragraph (e)(3), if the originating broker for a segmented order that is the 

originating broker responsible for approving the opening of accounts with customers determines 

to make the certification referenced in paragraph (c)(1)(iii) of Proposed Rule 615, the originating 

broker shall establish, maintain, and enforce the required policies and procedures reasonably 

designed to assure that the identity of the originating broker will not be disclosed.264 As 

discussed above, the certification must also be communicated to the open competition trading 

center operating the qualified auction.265 The Commission believes that broker-dealers would 

likely use order marking systems to communicate to an open competition trading center whether 

                                                
264  Supra section IV.E. 

265  Supra section IV.C.1. 



144 

 

an originating broker has made the certification referenced in Proposed Rule 615(c)(1)(iii). 

Accordingly, the originating broker with responsibility for transmitting orders for a customer’s 

account would mark segmented orders to indicate that the certification has been made, and other 

broker-dealers that receive and route such orders would also mark such orders accordingly. As 

discussed below, the Commission believes that broker-dealers would have an initial burden to 

modify their systems to be able to mark segmented orders as such, and an ongoing burden to 

mark segmented orders. The Commission also believes that broker-dealers would include in 

those systems modifications, the ability to communicate whether an originating broker has made 

the referenced certification, and on an ongoing basis would include the certification information, 

as applicable, when marking segmented orders. Thus, the Commission believes that the initial 

burden for broker-dealers to modify their systems to mark orders as segmented orders and the 

ongoing burden to mark segmented orders as such, as discussed below, would subsume the 

burden to mark orders to communicate when the certification has been made and therefore 

estimates no additional costs associated with communication of the certification. 

 

Pursuant to paragraph (d)(1) of Proposed Rule 615, a national securities exchange or 

NMS Stock ATS shall not operate a qualified auction for segmented orders unless it meets the 

definition of open competition trading center in Proposed Rule 600(b)(64).266 For an NMS Stock 

ATS to qualify as an open competition trading center eligible to operate a qualified auction, 

Proposed Rule 600(b)(64)(ii)(D) would require the NMS Stock ATS to permit any registered 

broker or dealer (other than a broker or dealer subject to a statutory disqualification) to become a 

subscriber of the ATS. The NMS Stock ATS could, however, pursuant to written policies and 

                                                
266  Supra section IV.B.2, and IV.D. 



145 

 

procedures, prohibit a broker or dealer from being or becoming a subscriber, or impose 

conditions on a broker or dealer subscriber, that does not meet standards of financial 

responsibility or operational capability, as are prescribed by the written policies and procedures. 

Thus, to be able to exclude a broker-dealer from becoming a subscriber (other than a broker or 

dealer subject to a statutory disqualification), or imposing conditions on such a subscriber, the 

NMS Stock ATS would be required to have written policies and procedures. 

B. Proposed Use of Information 

 As discussed above,267 Proposed Rule 615 is designed to benefit individual investors by 

enhancing the opportunity for their orders to receive more favorable prices than they receive in 

the current market structure, as well as to benefit investors generally by giving them an 

opportunity to interact directly with a large volume of individual investor orders that are mostly 

inaccessible to them in the current market structure, by requiring that individual investor orders 

be exposed to order-by-order competition in fair and open auctions designed to obtain the best 

prices before such orders could be internalized by wholesalers or any other type of trading center 

that restricts order-by-order competition. 

 

The auction messages provided under paragraph (c)(1) of Proposed Rule 615 would be 

disseminated in consolidated market data and would be used by market participants to determine 

whether to submit auction responses. As discussed above, the wide dissemination of these 

auction messages would promote competition by soliciting potential auction responses from a 

wide spectrum of market participants.268 

                                                
267  Supra section I. 

268  Supra section IV.C.1. 



146 

 

 

 

The requirements of paragraph (e)(1) of Proposed Rule 615 are designed to ensure that 

originating brokers are able to properly identify segmented orders. Specifically, written policies 

and procedures established pursuant to Proposed Rule 615(e)(1) would help a broker develop a 

process, relevant to its customers and the nature of its business, for properly identifying the 

orders of its customers as segmented orders. Further, the maintenance of written policies and 

procedures would generally: (1) assist a broker-dealer in supervising and assessing its 

compliance with Proposed Rule 615; and (2) assist the Commission and SRO staff in connection 

with examinations and investigations.  

 

Marking segmented orders as such pursuant to paragraphs (e)(2) and (f)(1) of Proposed 

Rule 615 would inform other market participants that the orders must be handled in accordance 

with the requirements of Proposed Rule 615, which, as discussed above, is designed to provide 

competition for individual investor orders in fair and open auctions. 

 

Written policies and procedures established pursuant to Proposed Rule 615(e)(3) would 

help a broker develop a process, relevant to the nature of its business, to ensure that its identity 

will not be disclosed and to support its certification. Further, the maintenance of written policies 

and procedures would generally: (1) assist a broker in supervising and assessing its compliance 

with Proposed Rule 615(e)(3); and (2) assist the Commission and SRO staff in connection with 

examinations and investigations.  

Communication of the certification to the relevant open competition trading center would 

enable the open competition trading center to comply with the requirements of Proposed Rule 



147 

 

615(c)(1) that an auction message disclose the identity of the originating broker for a segmented 

order, unless the originating broker has made the requisite certification.269 

 

To qualify as an open competition trading center, an NMS Stock ATS would be required 

to permit any registered broker-dealer (other than a broker-dealer subject to a statutory 

disqualification) to become a subscriber of the NMS Stock ATS, and must provide equal access 

among all subscribers of the NMS Stock ATS.270 These requirements are designed to help ensure 

a level playing field regarding Proposed Rule 615 for competition among NMS Stock ATSs and 

national securities exchanges, in light of the different regulatory regimes for each. Similar to the 

requirements for national securities exchanges, under Proposed Rule 600(b)(64)(ii)(D), NMS 

Stock ATSs could exclude a registered broker-dealer, or impose conditions on a broker-dealer 

becoming a subscriber, that does not meet certain standards of financial responsibility or 

operational capability, but may only do so pursuant to written policies and procedures. While 

national securities exchanges must prescribe rules, consistent with the Exchange Act, for denying 

membership to a broker-dealer, the requirements applicable to NMS Stock ATSs are less 

stringent.271 Requiring NMS Stock ATSs to establish written policies and procedures would help 

an NMS Stock ATS to develop a process for identifying registered broker-dealers that should be 

excluded because they do not meet certain standards, and would help level the competitive 

playing field regarding Proposed Rule 615 between NMS Stock ATSs and national securities 

                                                
269  As discussed above, the disclosure of the identity of the originating broker in an auction message, absent 

the corresponding certification, is designed to help ensure fair competition among auction responders and 

persons that could otherwise trade with the segmented order, while giving originating brokers a choice as to 

whether or not to disclose their identity. Supra section IV.C.1. 

270  Supra section IV.B.2. 

271  Id. 



148 

 

exchanges. Further, the written policies and procedures would generally: (1) assist an NMS 

Stock ATS in supervising and assessing its compliance with the access requirements of proposed 

Rule 600(b)(64)(ii)(D); and (2) assist the Commission and SRO staff in connection with 

examinations and investigations. 

C. Respondents 

A summary of the Commission’s initial estimates of the number of respondents for each 

collection of information requirement is set forth below: 

  



149 

 

 

Collection of Information - Order Competition Rule 

Description of Burden Rule Applicable Respondents Number of 

Respondents 

Dissemination of Auction 

Messages 

Rule  

615(c)(1) 

National securities 

exchanges operating 

qualified auctions 

6 

National securities 

associations 

1 

NMS Stock ATSs 

operating qualified 

auctions  

3 

Total 10 

Policies and Procedures to Identify 

Segmented Orders 

Rule 

615(e)(1) 

Originating broker-dealers 

with responsibility for 

identifying segmented 

orders 

157 

Identification of Segmented Orders 

by Originating Brokers 

Rule 

615(e)(2) 

Originating broker-dealers 

with responsibility for 

identifying segmented 

orders 

157 

Marking of Segmented Orders 
   

Marking of Segmented Orders 

by Originating Brokers 

Rule 

615(e)(2) 

Originating broker-dealers 

with responsibility for 

marking segmented orders 

157 

Marking of Segmented Orders 

by Broker-Dealers 

Rule 

615(f)(1) 

Broker-dealers that route 

orders identified as 

segmented orders  

25 

 
Total 182 

Policies and Procedures for Rule 

615(c) Certification 

Rule 

615(e)(3) 

Originating broker-dealers 

certifying that they 

established, maintained, 

and enforced policies and 

procedures reasonably 

designed to assure that 

their identity will not be 

disclosed 

20 

NMS Stock ATS Policies and 

Procedures to Exclude Subscribers 

Rule 

615(d)(1) 

NMS Stock ATSs 

operating qualified 

auctions that may exclude 

subscribers 

3 

 



150 

 

 

As discussed above,272 the open competition trading centers that would be required to 

provide auction messages for dissemination in consolidated market data pursuant to paragraph 

(c)(1) of Proposed Rule 615 would be national securities exchanges and NMS Stock ATSs that 

meet certain requirements and are eligible to operate qualified auctions for segmented orders. As 

is currently the case for quotation and trading information in NMS stocks, auction information 

would be provided by national securities exchanges and FINRA, as the only national securities 

association, to the SIPs for dissemination in consolidated market data.273 

Given that all national securities exchanges already have systems and processes for 

providing information for dissemination in consolidated market data as well as systems and 

processes for disseminating certain auction information,274 the Commission estimates that it is 

likely that 6 of the 16 national securities exchanges that trade NMS stocks would choose to 

qualify as open competition trading centers and operate qualified auctions. Of the 16 registered 

national securities exchanges currently trading NMS stocks,275 12 are part of one of 3 corporate 

affiliate groups, and the Commission estimates that one of the national securities exchanges from 

each of the three corporate groups would likely choose to operate qualified auctions.276 Of the 

                                                
272  Supra section IV.B.2. 

273  Supra sections III.B.1 and IV.C.1. 

274  Supra section IV.B.1. In addition to providing consolidated market data, national securities exchanges also 
sell their individual proprietary market data products, and their depth of book (“DOB”) products typically 

include, among other things, information about orders participating in auctions, including auction order 

imbalances. See, e.g., Nasdaq Rule 123(a)(1)(B) available at 

https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%207#section_123_nasdaq_dept

h-of-book_data (defining Nasdaq’s “Nasdaq TotalView” data product); and https://www.nyse.com/market-

data/real-time/integrated-feed (describing NYSE’s “NYSE Integrated” data product). 

275  Supra note 82 and accompanying text. 

276  CBOE Holdings, Inc. is the parent company of Cboe BYX, Cboe BZX, Cboe EDGA, and Cboe EDGX; 

Nasdaq, Inc. is the parent company of Nasdaq BX, Nasdaq PhlX, and Nasdaq; Intercontinental Exchange, 

Inc. is the parent company of NYSE, NYSE American, NYSE Arca, NYSE CHX, and NYSE National. 

https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%207#section_123_nasdaq_depth-of-book_data
https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%207#section_123_nasdaq_depth-of-book_data
https://www.nyse.com/market-data/real-time/integrated-feed
https://www.nyse.com/market-data/real-time/integrated-feed


151 

 

four other national securities exchanges that currently trade NMS stocks, the Commission 

estimates that three exchanges would likely choose to operate qualified auctions.277 

The Commission also estimates that some, but not all NMS Stock ATSs would chose to 

operate qualified auctions for segmented orders. One of the requirements of Proposed Rule 615 

is that an open competition trading center must meet the definition set forth in Proposed Rule 

600(b)(64), which would require that an NMS Stock ATS permit any registered broker or dealer 

(other than a broker or dealer subject to a statutory disqualification) to become a subscriber and 

provide equal access among all subscribers. To qualify as an open competition trading center, 

Proposed Rule 600(b)(64) would also require an NMS Stock ATS to display quotations through 

an SRO display-only facility and operate as an automated trading center that displays automated 

quotations disseminated in consolidated market data. Given that NMS Stock ATSs often 

differentiate between groups or classes of subscribers with respect to access to services and most 

have adopted a “dark” trading model,278 of the 32 NMS Stock ATSs, the Commission estimates 

that approximately three are likely to make the business model modifications necessary to meet 

the open competition trading center definition and be eligible to operate qualified auctions.279 

                                                
277  The remaining four national securities exchanges that trade NMS stocks are IEX, LTSE, MEMX, and 

MIAX PEARL, which is a subsidiary of MIAX International Holdings, Inc. Of these, based on examination 

of data related to national securities exchanges, for the month ended Nov. 30, 2022, only LTSE did not 

report more than 1% of share volume in NMS stocks. Proposed Rule 600(b)(64) requires a national 

securities exchange to have had an average daily share volume for NMS stocks of 1% or more during at 

least four of the preceding 6 calendar months to qualify as an open competition trading center eligible to 

operate a qualified auction. See Cboe, U.S. Historical Market Volume Data, available at: 

https://cboe.com/us/equities/market_statistics/historical_market_volume/. 

278  NMS Stock ATSs must publicly disclose information about their trading system and services, including 
differences in access, on Form ATS-N. Links to Form ATS-N filings are available on the Commission’s 

website at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm. See also ATS-N Adopting 

Release, supra note 159, 83 FR at 38886 n.1292 and accompanying text (discussing the dark trading model 

adopted by most NMS Stock ATSs). 

279  The Commission bases this estimate on the following considerations. While currently no NMS Stock ATS 

would qualify as an Open Competition Trading Center, there is currently one NMS Stock ATS that 

discloses that it crosses the 5% volume threshold for fair access under Regulation ATS for securities that 

https://cboe.com/us/equities/market_statistics/historical_market_volume/
https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm


152 

 

As discussed above, broker-dealers provide certain NMS stock information to FINRA 

through its facilities, and FINRA provides information for dissemination in consolidated market 

data. To qualify as open competition trading centers, the three NMS Stock ATSs would have 

systems and processes in place to display quotations disseminated in consolidated market data. 

These ATSs would provide auction message information to FINRA, and FINRA would transmit 

the information for dissemination in consolidated market data. 

The Commission requests comment on its estimates of the number of exchanges and 

NMS Stock ATSs that would become open competition trading centers operating qualified 

auctions, including whether the estimates should be lower or higher.  

 

As discussed above, Proposed Rule 615 would impose certain obligations on originating 

brokers, and all other broker-dealers, with respect to their handling of segmented orders. 

Proposed Rule 600(b)(69) defines “originating broker” to mean any broker with responsibility 

for handling a customer account,280 and Proposed Rule 600(b)(91) defines “segmented order” as 

an order for the account of a natural person (or an account held on behalf of a natural person or 

group of related family members) that meets certain trading volume thresholds.281 Most 

segmented orders are handled by large, customer-facing broker-dealers that accept orders from 

customers and then route these orders to various execution centers. Also, as discussed above, in 

                                                
are available for trading on its platform. This NMS Stock ATS may choose to make the necessary 

modifications to operate as an Open Competition Trading Center. In addition, given the low-cost nature of 

segmented order flow that is likely to be attractive to market participants, the Commission estimates that 
two additional NMS Stock ATSs would choose to make the necessary modifications to operate as Open 

Competition Trading Centers. 

280  Supra section IV.B.4. 

281  Supra section IV.B.1. 



153 

 

section IV.B.4, broker business practices can vary widely in terms of how customer accounts are 

handled, with some brokers performing the entire function internally and others allocating 

various responsibilities of an originating broker to other brokers-dealers such as carrying or 

clearing brokers. Those originating brokers who have been assigned responsibilities that include 

the transmission of orders for execution would need to identify and mark segmented orders as 

such to comply with Proposed Rule 615.282  

Based on FOCUS Report data,283 the Commission estimates that as of June 30, 2022 

there were 3,498 registered broker-dealers,284 and of these there were 157 reporting that they 

carry public customer accounts285 that would likely be subject to the requirements of paragraphs 

(e)(1) and (2) of Proposed Rule 615.  

Paragraph (f)(1) of Proposed Rule 615 would also require every broker-dealer that 

receives a segmented order and routes that order to identify the order as such. This would include 

broker-dealers that act as wholesalers that would be required to route a segmented order to be 

exposed in a qualified auction at a price prior to executing it, or that route the order to another 

execution center; and any other broker-dealer, including originating broker-dealers assigned 

responsibilities that include identifying and marking orders, that routes segmented orders. The 

                                                
282  Supra section IV.B.4. 

283  FOCUS Reports, or “Financial and Operational Combined Uniform Single” Reports, are monthly, 

quarterly, and annual reports that broker-dealers are generally required to file with the Commission and/or 

SROs pursuant to Exchange Act Rule 17a-5. See 17 CFR 240.17a-5. 

284  The data is obtained from FOCUS Reports, Part II filed for the second quarter of 2022. 

285  Information on the number broker-dealers that carry public customer accounts is from broker-dealers’ 

responses on their most recently available FOCUS Report Form X-17A-5 Schedule I. Because “public 

customer accounts” may hold orders other than segmented orders, for example institutional customers 

would also fall within the definition of “public customer” for purposes of FOCUS Report Form X-17A-5 

Schedule I, 157 is likely an overestimate.  



154 

 

Commission estimates that approximately 25 broker-dealers that do not also carry customer 

accounts would route retail orders.286 

 

As discussed above, the Commission estimates that there are 157 originating brokers that 

would be required to establish, maintain, and enforce written policies and procedures reasonably 

designed to identify customer orders as segmented orders pursuant to paragraph (e)(1) of 

Proposed Rule 615. While there are additional broker-dealers, such as introducing brokers, that 

would meet the definition of “originating broker,” only those broker-dealers carrying customer 

accounts are likely to have been allocated responsibility for routing orders and therefore would 

have burdens and costs associated with implementing the requirements of paragraph (e)(1) of 

Proposed Rule 615. 

The Commission requests comment on whether its estimate of the number of brokers that 

would fall within the scope of Proposed Rule 615(e)(1), including whether the estimate should 

be higher or lower.  

 

As discussed above, the Commission estimates that there would be 157 originating 

brokers that would be required to identify segmented orders as such prior to routing those orders 

pursuant to Proposed Rule 615(e)(2). Additionally, the Commission estimates that there would 

be an additional 25 broker-dealers that route customer orders, and would not also be originating 

brokers in the scope of paragraph (e)(2), that would be required, pursuant to Proposed Rule 

                                                
286  This estimate is based broker-dealers’ responses on their most recently available FOCUS Report Form X-

17A-5 Schedule I, showing that there are 25 broker-dealers that effect public customer transactions in 

equity securities on a national securities exchange or OTC that do not carry public customer accounts. 



155 

 

615(f)(1) to identify any segmented orders received as such, when routing the order to a routing 

destination.  

The Commission requests comment on its estimate of the number of broker-dealers that 

would fall within the scope of paragraphs (e)(2) and (f)(1) of Proposed Rule 615, including 

whether the estimate should be higher or lower.  

 

It is likely that most originating brokers with segmented orders would choose to be 

identified as the originating broker of a segmented order because that information would be used 

by market participants to help predict the level of adverse selection costs associated with order 

flow from a given originating broker. Thus, originating brokers known to be associated with 

lower adverse selection costs would likely want auction responders to know their identity. Based 

on a review of data related to broker-dealers, the Commission estimates that there are 

approximately 1,267 broker-dealers that would meet the definition of “originating broker” and 

that have responsibility for monitoring customer accounts.287 These broker-dealers would be 

required to maintain the policies and procedures required by paragraph(e)(3) of Proposed Rule 

615 if they choose not to have their identity disclosed in auction messages. While it is very 

difficult for the Commission to know how many originating brokers would choose to certify that 

they established, maintained, and enforced written policies and procedures reasonably designed 

to assure that their identity will not be disclosed to any person that potentially could participate 

                                                
287  The Commission estimates that there are approximately 157 broker-dealers that carry at least one customer 

account trading in NMS stocks, and 1,110 broker-dealers that introduce at least one customer account 

trading in NMS stocks. The estimate of 157 broker-dealers that carry at least one customer account trading 
in NMS stocks and options is based on the number of broker-dealers that report carrying at least one 

customer account on their 2021 FOCUS Report Form X-17A-5 Schedule I; and the estimate of 1,110 

broker-dealers that introduce at least one customer account trading in NMS stocks and options is based on 

estimates using broker-dealers’ FDIDs identified in CAT data during the 2021 calendar year. As CAT data 

includes information only about NMS stocks and options, broker-dealers that introduce or carry customer 

accounts trading in other assets classes are not included in these numbers.  



156 

 

in the qualified auction or otherwise trade with the segmented order routed by the originating 

broker, the Commission preliminarily estimates that 20 of the 1,267 originating brokers would 

choose not to disclose their identity and would be required to establish, maintain and enforce the 

written policies and procedures required by paragraph (e)(3) of Proposed Rule 615. While 

segmented orders, by definition, are limited to orders for accounts with an average daily number 

of trades in NMS stocks of less than 40 in each of the six preceding months, and thereby likely 

associated with lower adverse selection costs, there may be some broker-dealers that have order 

flow associated with higher levels of adverse selection costs or who have customers or business 

models that preference anonymity.288  

As discussed above, the originating broker with responsibility for transmitting orders for 

a customer’s account would likely also mark segmented orders to indicate that the certification 

has been made, and other broker-dealers that receive and route such orders would also need to 

mark such orders accordingly. The same broker-dealers that would mark orders as segmented 

orders pursuant to paragraphs (e)(2) and (f)(1) of Proposed Rule 615, discussed above in section 

VI.C.2.b, would also likely mark orders, as applicable, to communicate the certification to the 

open competition trading center. 

The Commission requests comment on its estimate of the number of originating brokers 

that would certify that they have established, maintained, and enforced written policies and 

procedures reasonably designed to assure that the identity of the originating broker will not be 

disclosed, including whether the estimate should be higher or lower. The Commission also 

requests comment on whether it is reasonable to estimate that such certifications would be 

                                                
288  These broker-dealers are likely to be larger broker-dealers that have customers who are more informed 

traders. Lower-volume broker-dealers with fewer orders are not likely to have this type of customer. 



157 

 

communicated to open competition trading centers via order marking and that the same broker-

dealers that would mark orders as segmented orders would also mark orders for the purpose of 

communicating such certifications to the open competition trading centers operating qualified 

auctions.  

 

As discussed above, of the 32 NMS Stock ATSs, the Commission estimates that 

approximately 3 would operate qualified auctions. To do so, those NMS Stock ATSs would need 

to meet the definition of open competition trading center, and as such, would be required to have 

written policies and procedures to prohibit any registered broker or dealer from being or 

becoming a subscriber, or impose conditions upon a such a subscriber, that does not meet the 

standards of financial responsibility or operational capability of the NMS Stock ATS. The 

Commission anticipates that all three NMS Stock ATSs operating qualified auctions would have 

standards for financial responsibility or operational capability for their subscribers.289 

The Commission requests comment on whether its estimate that all NMS Stock ATSs 

operating qualified auctions would have standards for financial responsibility or operational 

capability for their subscribers is reasonable.  

D. Burdens 

 

As discussed above, the estimated six national securities exchanges operating as open 

competition trading centers operating qualified auctions would be required to collect and provide 

the information necessary to generate auction messages in consolidated market data. These 

entities currently operate auctions for which messages are disseminated in their proprietary data 

                                                
289  This estimate is based on a review of NMS Stock ATS disclosures on Form ATS-N. 



158 

 

feeds, and already provide other information regarding NMS stocks for dissemination in 

consolidated market data. The auction messages would be a new data element that the national 

securities exchanges would have to make available for inclusion in the dissemination of 

consolidated market data. Because the national securities exchanges currently collect and 

calculate data necessary to generate other elements of consolidated market data, and also 

currently provide auction information to subscribers of proprietary data, the requirements of Rule 

615(c)(1) would likely impose minimal initial and ongoing burdens on these respondents, 

including any changes to their systems. 

The Commission estimates that a national securities exchange would require an average 

of 220 initial burden hours of legal, compliance, information technology, and business operations 

personnel time to prepare and implement a system to collect and provide the information 

necessary to generate auction messages for dissemination in consolidated market data, at a 

monetized cost per exchange of $78,580.290 And each national securities exchange would incur 

an annual average burden on an ongoing basis of 336 hours to collect and provide auction 

messages, at a monetized cost per exchange of $118,560.291 

Proposed Rule 615(c)(1) would also require auction messages initiating qualified 

auctions held on NMS Stock ATSs operating as open competition trading centers to be provided 

                                                
290  The Commission estimates the monetized initial burden for this requirement to be $78,580: (Compliance 

Manager at $344 for 105 hours) + (Attorney at $462 for 70 hours) + (Sr. Systems Analyst at $316 for 20 

hours) + (Operations Specialist at $152 for 25 hours) = 220 initial burden hours, at a monetized cost of 

$78,580. Throughout this section VI.D, the Commission derived estimates for in-house personnel costs on 

per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, 

modified to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for 

bonuses, firm size, employee benefits and overhead. 

291  The Commission estimates the monetized ongoing, annual burden for this requirement to be $118,560: 

(Compliance Manager at $344 for 192 hours) + (Attorney at $462 for 48 hours) + (Sr. Systems Analyst at 

$316 for 96 hours) = 336 initial burden hours, at a monetized cost of $118,560. 



159 

 

for dissemination in consolidated market data. As discussed above, like national securities 

exchanges, FINRA already collects information from broker-dealers for dissemination in 

consolidated market data, and the addition of auction message information as a new data element 

would impose approximately the same burdens and costs on FINRA as for national securities 

exchanges.292 

 To qualify as an open competition trading center eligible to operate qualified auctions, an 

NMS Stock ATS would need to display quotations through an SRO display-only facility in 

compliance with Rule 610(b); display automated quotations disseminated in consolidated market 

data pursuant to Rule 603(b);293 and provide trade reports identifying the NMS Stock ATS as the 

venue of execution that are disseminated in consolidated market data pursuant to Rule 603(b).294 

These ATSs would need to have systems in place to collect and calculate such information and 

transmit the information to FINRA for dissemination in consolidated market data. It is likely that 

NMS Stock ATSs that run qualified auctions would be operated by large, sophisticated broker-

dealers that have in place systems that could be modified to collect and disseminate auction 

message information. The Commission estimates that the burdens and costs to these NMS Stock 

ATSs to modify their systems to also provide auction information for dissemination in 

consolidated data would be minimal, and would be the same as those for national securities 

exchanges and FINRA.295 

                                                
292   Supra notes 290 and 291. 

293  The requirements of Rule 610(b) for trading centers that choose to display quotations in NMS stock are 

existing requirements under Regulation NMS, and the requirements of Rule 603(b) pertaining to the display 

of quotations from trading centers that qualify as automated trading centers, are existing requirements that 

are not modified by Proposed Rule 615 and the proposed new definitions under Rule 600 and do not 

constitute new collections of information. 

294   Proposed Rule 600(b)(64)(ii). 

295   Supra notes 290 and 291. 



160 

 

 The Commission estimates the initial total aggregate burden and cost for all 10 

respondents would be 2,220 hours, at a monetized cost of $785,800,296 and the ongoing total 

burden and cost would be 3,360 hours, at a monetized cost of $1.12 million.297 

 A summary of the initial and ongoing burdens and costs described above is set forth 

below: 

Total Estimated Burden Associated With Providing Auction Messages In Consolidated 

Market Data  
Respondents Burden 

Hours per 

Respondent 

Aggregate 

Burden Hours 

Monetized 

Cost per 

Respondent 

Aggregate 

Monetized 

Cost 

Total Initial 

Burden 

10 220 2,220 $78,580  $785,800  

Total Ongoing 

Burden 

10 336 3,360 $118,560  $1,185,600  

 

 The Commission requests comment on whether there would be different or additional 

burdens or costs for open competition trading centers to provide the information necessary to 

generate auction messages in consolidated market data. The Commission also requests comment 

on whether the burdens and costs for NMS Stock ATSs to provide the information necessary to 

generate auction messages in consolidated market data would be different from those for national 

securities exchanges.  

                                                
296  The Commission estimates the monetized ongoing, annual burden for this requirement to be $785,800: 

$78,580 x (6 national securities exchange + 1 registered securities association + 3 NMS stock ATSs) = 

$785,800. 

297  The Commission estimates the monetized ongoing, annual burden for this requirement to be $1,185,600: 

$118,560 x (6 national securities exchange + 1 registered securities association + 3 NMS stock ATSs) = 

$1,185,600.161 

 

 

 

As discussed above, the 157 broker-dealers that would need to identify and mark orders 

to comply with paragraphs (e)(1) and (e)(2) of Proposed Rule 615 likely already would have 

policies and procedures to classify orders for compliance with SRO rules and other regulatory 

requirements, and would have access to the information that would enable them to identify 

orders as being for the account of a natural person or a group of related family members and to 

monitor the level of trading activity in the accounts of their customers, as well as systems and 

processes for marking orders.298 For example, these broker-dealers either themselves collect data 

from their customers, or receive such information through an introducing broker for whom they 

are providing services. These broker-dealers will also be familiar with how to adapt their systems 

and processes to identify which customer accounts meet the proposed volume requirements that 

would cause their orders to meet the definition of segmented order in Proposed Rule 600(b)(89) 

and to accommodate the new order marks.  

While most broker-dealers likely have capabilities to identify the characteristics of their 

customers’ orders that would be necessary to identify orders as segmented orders, they would not 

have written policies and procedures regarding the identification of segmented orders, which 

would be a new classification for a subset of customer orders, as would be required by Proposed 

Rule 615(e)(1). The Commission estimates that, to initially comply with this obligation, broker-

dealers would employ a combination of in-house and outside legal and compliance counsel to 

update existing policies and procedures.  

  

                                                
298  Supra section IV.B.1 (discussing the definition of segmented order, which is designed to facilitate 

compliance and minimize the costs of compliance) and note 253 and accompanying text.  



162 

 

Initial Burdens and Costs 

The Commission estimates that each of the 157 broker-dealers that would be subject to 

the collection of information under Proposed Rule 615(e)(1) would incur an initial average 

internal burden of 40 hours for in-house legal and 10 hours for in-house compliance counsel to 

update existing policies and procedures to comply with paragraph (e)(1) of Proposed Rule 615, 

and an initial in-house burden of 5 hours each for a General Counsel and a Chief Compliance 

Officer to review and approve the updated policies and procedures, for a total of 60 burden 

hours, at a monetized cost of $28,800.299 In addition, the Commission estimates a cost of $4,960 

for outside counsel to review the updated policies and procedures on behalf of a broker-dealer.300 

The Commission therefore estimates the aggregate initial burden for originating brokers to be 

9,420 burden hours301 at a monetized cost of $4.52 million,302 and the aggregate initial cost for 

outside counsel to be $778,720 to establish policies and procedures as required by Proposed Rule 

615(e)(1).303  

  

                                                
299  The Commission estimates the monetized initial burden for this requirement to be: (Attorney at $462 for 40 

hours) + (Compliance Counsel at $406 for 10 hours) + (Deputy General Counsel at $663 for 5 hours) + 

(Chief Compliance Officer at $589 for 5 hours) = 60 initial burden hours and a monetized cost of $28,800. 

300  The Commission’s estimates of the relevant wage rates for outside legal services takes into account staff 

experience, a variety of sources including general information websites, and adjustments for inflation. The 

Commission estimates that the average hourly rate for legal services is $496/hour. This cost estimate is 

therefore based on the following calculation: (10 hours of review) x ($496/hour for outside counsel service) 

= $4,960 in outside counsel costs. 

301  This estimate is based on the following calculation: (60 burden hours of review per broker-dealer) x (157 

broker-dealers) = 9,420 aggregate burden hours. 

302  This estimate is based on the following calculation: ($28,800 per broker-dealer) x (157 broker-dealers) = 

$4,521,600. 

303  This estimate is based on the following calculation: ($4,960 for outside costs per broker-dealer) x (157 

broker-dealers) = $778,720 in outside counsel costs. 



163 

 

Ongoing Burdens and Costs 

The Commission estimates that broker-dealers would review and update their policies 

and procedures for compliance with Proposed Rule 615 on an annual basis, and that they would 

perform the review and update using in-house personnel. The Commission estimates that each 

broker-dealer would annually incur an internal burden of twelve hours to review and update 

existing policies and procedures of 4 hours for legal personnel, 4 hours for compliance 

personnel, and 4 hours for business-line personnel at a monetized cost of $4,476.304 The 

Commission therefore estimates an ongoing, aggregate burden for broker-dealers of 1,884 hours, 

at a monetized cost of $702,732.305  

  

                                                
304  The Commission estimates the monetized ongoing, annual burden for this requirement to be: (Attorney at 

$462 for 4 hours) + (Compliance Counsel at $406 for 4 hours) + (Intermediate Business Analyst at $251 for 

4 hours) = 12 ongoing burden hours and $4,476. 

305  These estimates are based on the following calculations: (12 burden hours per broker-dealer) × (157 broker-

dealers) = 1,884 aggregate ongoing burden hours; and $4,476 per broker-dealer x 157 broker-dealers = 

$702,732. 



164 

 

A summary of the initial and ongoing burdens and costs described above is set forth 

below: 

Total Estimated Outside Costs to Establish Policies and Procedures to Identify Segmented 

Orders  
Respondents Outside Cost per Respondent  Aggregate Outside Cost 

Total Initial 

Outside Costs 

157 $4,960  $778,720  

 

Total Estimated Burden to Establish and Maintain Policies and Procedures to Identify 

Segmented Orders  
Respondents Burden 

Hours per 

Respondent 

Aggregate 

Burden Hours 

Monetized 

Cost per 

Respondent 

Aggregate 

Monetized Cost 

Total 

Initial 

Burden 

157 60 9,420 $28,800  $4,521,600 

Total 

Ongoing 

Burden 

157 12 1,884 $4,476  $702,732  

 

The Commission requests comment on whether there would be different or additional 

burdens or costs for originating brokers to establish and maintain written policies and procedures 

to identify segmented orders.  

 

As discussed above, the Commission estimates that there are 157 broker-dealers that 

would need to mark segmented orders as such to comply with paragraph (e)(2) of Proposed Rule 

615, and an additional 25 broker-dealers that would not be required to comply with the marking 



165 

 

requirements of paragraph (e)(2) of Proposed Rule 615, but would be required to mark orders 

prior to routing as required by paragraph (f)(1) of Proposed Rule 615.306 

Initial burdens and Costs 

For purposes of complying with Proposed Rule 615(e)(2), for an originating broker to 

identify whether a customer order meets the definition of “segmented order” and must be marked 

accordingly, a broker-dealer would first need to establish mechanisms to proactively and 

systematically identify which orders for NMS stocks are for the account of customers that are 

natural persons or held in a legal form on behalf of a natural person or group of related family 

members; and of those, which are orders for an account in which the average daily number of 

trades in NMS stocks was less than 40 in each of the six preceding months.307 For purposes of 

this analysis, and as discussed above, the Commission believes that most broker-dealers already 

collect information about their customers’ accounts, or receive information about customer 

accounts from an introducing broker, and would already have an existing technological 

infrastructure in place, and the Commission assumes that such infrastructure would need to be 

modified to effect compliance with Proposed Rule 615.  

Acknowledging that costs and burdens may vary greatly according to the size or 

complexity of the broker-dealer and that some broker-dealers would implement the changes in-

house, while others would engage a third party vendor. The Commission estimates that 

approximately one third of the 157 broker-dealers (or 52) would implement the changes in-

house, while the remaining 105 would engage a third-party vendor. The Commission expects 

                                                
306  As discussed above, these broker-dealers would also mark orders, as applicable, to communicate that an 

originating broker certifies that it established, maintained, and enforced the requisite policies and 

procedures to assure that its identity would not be disclosed. 

307  Supra sections IV.B.1 and IV.E.  



166 

 

that the modification of a broker-dealer’s existing technology performed in-house would require 

260 hours at a monetized cost of $95,480.308 The Commission estimates that the burden for a 

broker-dealer engaging a third-party to implement the modifications would be 50 hours at a 

monetized cost of $18,385,309 and $35,000 for the third-party service provider to perform the 

necessary work.310 The aggregate burden for those broker-dealers to modify existing technology 

to identify segmented orders that perform the modification in-house would therefore be 13,520 

burden hours, at a monetized cost of $4,964,960;311 and the aggregate costs and burdens for those 

broker-dealers employing a third-party service provider would be $3,675,000312 and 5,250 

burden hours, at a monetized cost of $1,930,425.313  

For purposes of compliance with Proposed Rule 615(f)(1), a segmented order received by 

a routing broker-dealer would already have been identified as such by the originating broker 

pursuant to Proposed Rule 615(e)(2). Like originating broker-dealers, these 25 broker-dealers, 

would however, need to modify their systems to enable them to mark orders as segmented orders 

prior to routing such orders to a routing destination.  

                                                
308  The Commission estimates the monetized initial burden for this requirement to be: (Sr. Programmer at 

$368 for 160 hours) + (Sr. Database Administrator at $379 for 40 hours) + (Sr. Business Analyst at $305 

for 40 hours) + (Attorney at $462 for 20 hours) = 260 initial burden hours and a monetized cost of $95,480. 

309  The Commission estimates the monetized initial burden for this requirement to be: (Sr. Business Analyst 

for 15 hours at $305 per hour) + (Compliance Manager for 20 hours at $344 per hour) + (Attorney for 15 

hours at $462 per hour) = 50 initial burden hours at a monetized cost of $18,385. 

310  The Commission’s estimate is based on prior estimates for the cost of systems modifications to capture 

additional order handling information. Securities Exchange Act Release No. 84528 (Nov. 2, 2018 ) 83 FR 

58338 (Nov. 19, 2018) at 58383, n.492 and accompanying text. 

311  This cost estimate is based on the following calculation: (260 initial burden hours at a monetized cost of 

$95,480) x (52 broker-dealers) = 13,520 initial burden hours and a monetized cost of $4,964,960. 

312  This cost estimate is based on the following calculation: ($35,000 in third-party service provider costs per 

broker-dealer) x (105 broker-dealers) = $3,675,000 in aggregate outside third-party provider costs. 

313  The Commission estimates the aggregate monetized initial burden for this requirement to be: (50 initial 

burden hours at a monetized cost of $18,385) x (105 broker-dealers) = 5,250 initial burden hours and a 

monetized cost of $1,930,425. 



167 

 

 The Commission estimates that the 157 originating brokers and the additional 25 routing 

broker-dealers would each incur ongoing burdens to mark orders as “segmented orders” (and as 

applicable to communicate an originating broker’s certification), which are discussed further 

below, as well as initial, one-time technology project costs to update their existing order marking 

systems. The Commission estimates the initial one-time technology project costs for originating 

brokers to add the “segmented order” and certification marks to their existing marking systems to 

comply with paragraph (e)(2) of Proposed Rule 615, and the initial one-time technology project 

costs for routing broker-dealers to add the “segmented order” and certification marks to their 

existing marking systems to comply with paragraph (f)(1) of Proposed Rule 615, to be $170,000 

per broker-dealer,314 for a an aggregate total cost of $30.94 million.315 

Ongoing Burdens and Costs 

The Commission estimates that a total of approximately 2.2 billion “segmented orders” 

would be entered annually.316 This would make the average number of annual “segmented order” 

order marks by each of the 182 broker-dealers to be 11.9 million.317 Each instance of marking an 

order as a “segmented order,” and as applicable to communicate that an originating broker has 

                                                
314  This estimate is based on industry sources of the cost to program systems to add a new marking 

classification and adjusted for inflation. See, e.g., Securities Exchange Act Release No. 94313 (Feb. 25, 

2022), 87 FR 14950, 14976 (Mar. 16, 2022) (proposing amendments to Regulation SHO) (“Regulation 

SHO Amendment Proposal”). 

315  This cost estimate is based on the following calculation: ($170,000 system project costs per broker-dealer) 

x (157 originating broker-dealers + 25 routing broker-dealers) = $30,940,000 in aggregate system project 

costs. 

316  This estimate is based on CAT data for individual investor stock orders handled by wholesalers during Q1 

2022. See Tables 7 and 10, infra, sections VII.B.4 and VII.B.5 (showing a total of approximately 
271,310,000 orders handled during the period). Because as discussed in section VII.B.4 below, this number 

excludes certain orders, it likely significantly understates the total number of individual investor orders 

handled by wholesalers. We have therefore doubled the number for purposes of our estimate, and 

multiplied by four to arrive at an estimated annual number of segmented orders of 2,170,480,000.  

317  This figure was calculated as follows: 2,170,480,000 “segmented orders” orders requiring order marking 

divided by 182 broker-dealers. 



168 

 

certified that it has established, maintained, and enforced the requisite policies and procedures to 

assure that its identity will not be disclosed, is estimated to take between approximately 

0.00001158 and 0.000139 hours (0.042 and 0.5 seconds) to complete.318 Thus, it would take each 

of the 182 broker-dealers between approximately 138 to 1,658 hours to mark segmented orders 

annually;319 and the Commission estimates the aggregate burden to be between approximately 

25,134 and 301,697 hours.320 This estimate is based on a number of factors, including: 

previously estimated burdens for the current marking requirements of other Federal securities 

rules and regulations;321 that broker-dealers should already have the necessary mechanisms and 

procedures in place and already be familiar with processes and procedures to comply with other 

marking requirements under Federal securities rules and regulations (such as the requirements of 

Rule 200(g) of Regulation SHO); and that broker-dealers should be able to continue to use the 

same or similar mechanisms, processes and procedures to comply with Proposed Rule 615. 

                                                
318  The upper end of this estimate – 0.5 seconds – is based on the same time estimate for marking sell orders 

“long” or “short” under Rule 200(g) of Regulation SHO. See Regulation SHO Amendment Proposal, supra 

note 314, 87 FR at 14975 (citing Securities Exchange Act Release No. 50103 (July 28, 2004), 69 FR 

48008, 48023 (Aug. 6, 2004) (“Regulation SHO Adopting Release”). See also Securities Exchange Act 

Release No. 48709 (Oct. 28, 2003) 68 FR 62972, 63000 n. 232 (Nov. 6, 2003) and Securities Exchange Act 

Release No. 59748 (Apr. 10, 2009), 74 FR 18042, 18089 (Apr. 20, 2009) (providing the same estimate – 

0.5 seconds – for marking sell orders “short exempt” under Rule 200(g) of Regulation SHO)). The lower 

end of this estimate – 0.042 seconds – is based on a Commission estimate that computing speeds are twelve 

times faster today than they were in 2007. Regulation SHO Amendment Proposal, supra note 314, 87 FR at 

14975, 15000 (stating that according to an industry performance evaluation for server processors, 
computing speed has increased by at least 12 times since 2007 (the earliest year in the data and citing Year 

on Year Performance (for server processors), PassMark Software Pty. Ltd., available at 

https://www.cpubenchmark.net/year-on-year.html). 

319  These figures were calculated as follows: (11,925,714 “segmented orders” orders per broker-dealer) x 

(0.00001158 hours) = 138.10 hours; and (11,925,714 “segmented orders” orders per broker-dealer) x 

(0.000139 hours) = 1,657.67 hours. 

320  These figures were calculated as follows: (2,170,480,000 “segmented orders” orders requiring order 

marking) x (0.00001158 hours) = 25,134.16 hours; and (2,170,480,000 “segmented orders” orders) x 

(0.000139 hours) = 301,696.70 hours. 

321  See, e.g., Regulation SHO Amendment Proposal, supra note 314, 87 FR at 14975 (discussing estimated 

marking requirements to comply with Rule 200(g) of Regulation SHO which requires broker-dealers to 

mark sell orders “long,” “short,” or “short exempt”). 

https://www.cpubenchmark.net/year-on-year.html


169 

 

A summary of the estimated initial and ongoing burdens and costs described above is set 

forth below: 

Total Estimated Initial Burdens and Costs to Identify Segmented Orders  
Respondents Burden 

Hours  

Monetized Cost 

per Respondent 

Third-

party 

Cost 

Aggregate 

Burden 

Hours 

Aggregate 

Cost 

Initial 

Burden to 

Modify In-

house 

52 260 $95,480  
 

13,520 $4,964,960  

Initial In-

house 

Burden in 

connection 

with use of 

Third-

party 

105 50 $18,385  
 

5,250 $1,930,425  

Outside 

Costs for 

Third-

party 

Services 

105 
  

$35,000 
 

$3,675,000  

 

Total Estimated Initial System Modification Costs to Mark Segmented Orders 

 Respondents Cost per Respondent Aggregate Cost 

Initial Technology Costs 182 $170,000 $30,940,000 

 

Total Estimated Ongoing Burden to Mark Segmented Orders 

Originating 

brokers with 

individual 

accounts and 

routing 

brokers 

Annual 

segmented 

orders 

Annual 

segmented 

orders per 

originating 

broker 

Estimated 

burden hours 

per 

segmented 

order 

Total 

annual 

industry 

burden 

hours 

Annual burden 

per originating 

broker 

182 2,170,480,000 11,925,714 0.00001158 

to 

0.000139 

25,134 

to 

301,697 

138.10 

to 

1,657.68 

 



170 

 

The Commission requests comment on whether there would be different or additional 

burdens or costs for brokers to identify and mark segmented orders as such. Would the burdens 

and be lower or higher? Are broker-dealers more likely to perform these function in-house, or 

use third-party service providers? Should the estimated cost to employ a third-party service 

provider be lower or higher?  

 

Those originating brokers that do not want their identity to be disclosed in the auction 

message initiating a qualified auction would be required to establish, maintain and enforce 

written policies and procedures reasonably designed to assure that the identity of the originating 

broker will not be disclosed, directly or indirectly, to any person that potentially could participate 

in the qualified auction or otherwise trade with the segmented order. The Commission believes 

that originating brokers choosing to make certifications referred to in Proposed Rule 

615(c)(1)(iii) would be familiar with how to adapt their systems and processes to assure that the 

identity of the originating broker is not disclosed, in compliance with the requirements of 

Proposed Rule 615(e)(3). The Commission acknowledges that policies and procedures may vary 

greatly by broker-dealer, given the differences in size and the complexity of broker-dealer 

business models. Accordingly, the Commission believes that the need to update policies and 

procedures, as well as the ongoing compliance costs, might also vary greatly.  

Initial Burdens and Costs 

The Commission estimates that there would be 20 broker-dealers that would chose to 

make a Proposed Rule 615(c)(1)(iii) certification. To initially comply with the obligation to 

establish written policies and procedures to comply with Proposed Rule 615(e)(3), broker-dealers 

would employ a combination of in-house and outside legal and compliance counsel to update 

their existing policies and procedures. The Commission estimates that each of these 20 broker-



171 

 

dealers would incur a one-time average internal burden of 40 hours for in-house legal and 10 

hours for in-house compliance counsel to update existing policies and procedures to comply with 

paragraph (e)(3) of Proposed Rule 615, and a one-time burden of 5 hours each for a General 

Counsel and a Chief Compliance Office to review and approve the updated policies and 

procedures, for a total of 60 burden hours.322 In addition, the Commission estimates a cost of 

$4,960 for outside counsel to review the updated policies and procedures on behalf of a broker-

dealer.323 The Commission therefore estimates the aggregate initial burden for originating 

brokers to be 1,200 burden hours324 at a monetized cost of $576,000,325 and the aggregate total 

cost for outside counsel to be $99,200 to establish policies and procedures as required by 

Proposed Rule 615(e)(3).326  

Ongoing Burdens and Costs 

The Commission estimates that broker-dealers would review and update their policies 

and procedures for compliance with Proposed Rule 615 on an annual basis, and that they would 

perform the review and update using in-house personnel. The Commission estimates that each 

broker-dealer would annually incur an internal burden of twelve hours to review and update 

existing policies and procedures: four hours for legal personnel, four hours for compliance 

                                                
322  The Commission estimates the monetized ongoing, annual burden for this requirement to be: (Attorney at 

$462 for 40 hours) + (Compliance Counsel at $406 for 10 hours) + (Deputy General Counsel at $663 for 5 

hours) + (Chief Compliance Officer at $589 for 5 hours) = 60 initial burden hours and $28,800. 

323  This cost estimate is based on the following calculation: (10 hours of review) x ($496 per hour for outside 

counsel service) = $4,960 in outside counsel costs. 

324  This estimate is based on the following calculation: (60 burden hours of review per broker-dealer) x (20 

broker-dealers) = 1,200 aggregate burden hours. 

325  This estimate is based on the following calculation: ($28,800 per broker-dealer) x (20 broker-dealers) = 

$576,000. 

326  This estimate is based on the following calculation: ($4,960 for outside costs per broker-dealer) x (20 

broker-dealers) = $99,200 in outside counsel costs. 



172 

 

personnel, and four hours for in-line business personnel, at a monetized cost of $4,476.327 The 

Commission therefore estimates an ongoing, aggregate burden for broker-dealers of 

approximately 240 hours328 and a monetized cost of $89,520.329 The ongoing burden to 

communicate certifications is included with the cost for “segmented order” marking discussed 

above in section VI.D.2.b. A summary of the estimated initial and ongoing burdens and costs 

described above in this section VI.D.3 are set forth below: 

 

Total Estimated Outside Costs to Establish Policies and Procedures Reasonably Designed 

to Assure that the Originating Broker of a Segmented Order will not be Disclosed 
 

Respondents Outside Cost per Respondent Outside Aggregate Cost 

Initial Outside 

Costs 

20 $4,960  $99,200  

 

Total Estimated Burden to Establish and Maintain Policies and Procedures Reasonably 

Designed to Assure that the Originating Broker of a Segmented Order will not be 

Disclosed 

 Respondents Burden 

Hours per 

Respondent 

Aggregate 

Burden 

Hours 

Monetized 

Cost per 

Respondent 

Aggregate 

Monetized 

Cost 

Initial 

Burden 

20 60 1,200 $28,800  $576,000 

Ongoing 

Burden 

20 12 160 $4,476 $89,520 

 

The Commission requests comment on whether there would be different or additional 

burdens or costs for originating brokers to establish and maintain written policies and procedures 

                                                
327  The Commission estimates the monetized ongoing, annual burden for this requirement to be: (Attorney at 

$462 for 4 hours) + (Compliance Counsel at $406 for 4 hours) + (Compliance Counsel at $406 for 4 hours) 

+ (Intermediate Business Analyst at $251 for 4 hours) = 12 ongoing burden hours and $4,476. 

328  This estimate is based on the following calculation: (12 burden hours of review per broker-dealer) x (20 

broker-dealers) = 240 aggregate burden hours. 

329  The Commission estimates the monetized ongoing, annual burden for this requirement to be: ($4,476 per 

broker-dealer) x 20 broker-dealers = $89,520. 



173 

 

reasonably designed to assure that its identity will not be disclosed. For example, do brokers 

have existing policies and procedures related to ensuring confidentiality in other contexts that 

could be expanded upon or are there are additional burdens and costs associated with review of a 

broker’s internal systems that should be factored into the Commission’s estimate? Are 

originating broker’s likely to perform the function of establishing and maintaining these policies 

and procedures in-house or would they employ third-party service providers, such as outside 

counsel? Would originating brokers also have costs to modify their internal systems to prevent 

disclosure of the identity of the originating broker in support of a Proposed Rule 615(c)(1)(iii) 

certification or other costs in support of such a certification?  

 

The Commission believes that NMS Stock ATSs – in particular those whose broker-

dealer operators are large, multi-service broker-dealers – generally have,330 and likely maintain 

in writing, standards of financial responsibility and operational capability for subscribers to their 

system, and also generally have policies and procedures for admitting new persons as subscribers 

or limiting access to services. NMS Stock ATSs are not, however, currently required to have 

written policies and procedures for granting access to their trading system, unless they meet the 

fair access threshold of Rule 301(b)(5).331 NMS Stock ATSs are, however, required to disclose 

on Form ATS-N whether there are any conditions the ATSs requires a person to satisfy to 

become a subscriber and whether there are any limitations on access to services.332 The 

Commission therefore estimates that the burdens and cost for an NMS Stock ATS to comply 

                                                
330  This belief is based on a review of NMS Stock ATS disclosures on Form ATS-N. 

331  See supra note 214 and accompanying text. As discussed above, currently only one NMS Stock ATS 

discloses that it meets the fair access threshold. Supra section IV.B.2.b. 

332  See supra note 214. 



174 

 

with Proposed Rule 600(b)(64)(ii)(D) to qualify as an open competition trading center eligible to 

operate a qualified auction pursuant to Proposed Rule 615(d)(1) to be minimal. The Commission 

acknowledges that policies and procedures may vary greatly by NMS Stock ATS, given the 

differences in size and the complexity of business models. Accordingly, the Commission would 

expect that the need to update policies and procedures, as well as the ongoing compliance costs, 

might also vary. As discussed above, the Commission estimates that three NMS Stock ATSs may 

determine to modify their systems to operate as open competition trading centers and operate 

qualified auctions. To comply with this obligation, these NMS Stock ATSs would likely employ 

in-house legal and compliance counsel.333 

Initial Burdens and Costs 

For NMS Stock ATSs that have not recorded in writing their policies and procedures to 

prohibit any registered broker or dealer from being or becoming a subscriber, or impose 

conditions upon such a subscriber, that does not meet the standards of financial responsibility or 

operational capability as are prescribed by such written policies and procedures, the Commission 

estimates the initial burden and cost for an NMS Stock ATS that choses to comply with Proposed 

Rule 600(b)(64)(ii)(D) to be minimal. The Commission estimates that the initial burden for an 

NMS Stock ATS to review its existing policies and procedures for consistency with the proposed 

rule, to make modifications as appropriate, and to put the policies and procedures in writing 

                                                
333  The Commission based its estimate on the burden hour estimate provided in connection with the adoption 

of amendments to Rule 301(b)(10), which as amended requires all ATSs to maintain in writing their 

safeguards and procedures to protect subscribers’ confidential trading information, as well as the oversight 

procedures to ensure such safeguards and procedures are followed. See ATS-N Adopting Release, supra 

note 278, 83 FR at 38868. 



175 

 

would be approximately 8 hours, at a monetized cost of $3,106.334 Thus, the Commission 

estimates the aggregate initial burden to be 24 hours, at a monetized cost of $9,318.335 

Ongoing Burdens and Costs 

For purposes of this analysis, the Commission has assumed that NMS Stock ATSs would 

review and update their policies and procedures for compliance with Proposed Rule 

600(b)(64)(ii) on an annual basis, and that they would perform the review and update using in-

house personnel. The Commission estimates that each NMS Stock ATS would annually incur an 

internal burden of 8 hours to review and update existing policies and procedures, made up of 

four hours for legal personnel and four hours for compliance personnel, at a monetized cost of 

$2,680.336 The Commission therefore estimates an ongoing, aggregate burden for NMS Stock 

ATSs of approximately 24 hours at a monetized cost of $8,040.337  

A summary of the estimated initial and ongoing burdens and costs described above is set 

forth below: 

Total Estimated Burden to Establish and Maintain Policies and Procedures to Exclude 

Subscribers Based on Financial Responsibility or Operational Capability Standards  
Respondents Burden 

Hours per 

Respondent 

Aggregate 

Burden Hours 

Monetized 

Cost per 

Respondent 

Aggregate 

Monetized 

Cost 

Initial Burden  3 8 24 $3,106  $9,318 

Ongoing 

Burden  

3 8 24 $2,680  $8,040  

                                                
334  This estimate is based on the following: (Compliance Attorney at $406 for 7 hours) + (Sr. Compliance 

Examiner at $264 for 1 hour) = 8 burden hours and a monetized cost of $3,106. 

335  These estimates are based on the following calculations: (8 burden hours per NMS Stock ATS) x (3 NMS 

Stock ATSs) = 24 burden hours; and ($3,106 per NMS Stock ATS) x (3 NMS Stock ATSs) = $9,318. 

336  The Commission estimates the monetized ongoing burden for this requirement to be: (Compliance Attorney 

at $406 for 4 hours) + (Sr. Compliance Examiner at $264 for 4 hours) = 8 initial burden hours and a 

monetized cost of $2,680). 

337  These estimates are based on the following calculations: (8 burden hours per NMS Stock ATS) x (3 NMS 

Stock ATSs) = 24 burden hours; and at ($2,680 per NMS Stock ATS) x 3 NMS Stock ATSs = $8,040. 



176 

 

 

 The Commission is requesting comment on whether NMS Stock ATSs that would 

operate as open competition trading centers operating qualified auctions would have different or 

additional burdens and costs to maintain written policies and procedures to exclude a broker-

dealer subscriber, or impose conditions on such a subscriber, that does not meet standards of 

financial responsibility and operational capability.  

E. Collection of Information is Mandatory 

The collections of information required by Proposed Rule 615(c)(1) would be mandatory 

for national securities exchanges and NMS Stock ATSs that operate qualified auctions, and the 

one national securities association. The collections of information required by Proposed Rule 

615(e)(1) and (2) would be mandatory for broker-dealers that meet the proposed definition of 

“originating broker.” The collection of information required by Proposed Rule 615(e)(3) would 

be mandatory for originating brokers that communicate a certification to an open competition 

trading center pursuant to Proposed Rule 615(c)(1). The collection of information required by 

Proposed Rule 615(f)(1) would be mandatory for broker-dealers that receive and route 

segmented orders. The collection of information required by Proposed Rule 615(d)(1), in 

conjunction with Proposed Rule 600(b)(64)(ii)(D), would be mandatory for NMS Stock ATSs 

that operate as open competition trading centers and prohibit any broker or dealer from becoming 

a subscriber, or impose conditions upon such a subscriber, based on standards of financial 

responsibility or operational capability.  

F. Confidentiality of Information Collected 

The Commission would not typically receive confidential information as a result of 

Proposed Rule 615 or the related proposed amendments. To the extent that the Commission 



177 

 

receives – through its examination and oversight program, through an investigation, or by some 

other means records or disclosures from a broker-dealer that relate to or arise from Proposed 

Rule 615 or the related amendments that are not publicly available, such information would be 

kept confidential, subject to the provisions of applicable law.338 

 

As discussed above, auction messages initiating a qualified auction would be publicly 

disseminated in consolidated market data. These messages would include the identity of the open 

competition trading center, symbol, side, size, limit price, and identify of the originating broker, 

unless the originating broker made the certification specified in paragraph (c)(1)(iii) of Proposed 

Rule 615. 

 

 The identification of an order as a segmented order would be made available to any 

destination to which the order has been routed. The information would also be available to the 

Commission and its staff, and to other regulators. 

 

If an originating broker determines to make a certification referred to in paragraph 

(c)(1)(iii) of Proposed Rule 615, such certification must be communicated to the open 

competition trading center operating the applicable qualified auction, and any interim broker-

dealer routing a segmented order associated with a certification would also need to be made 

aware of the certification for purposes of communicating the certification to the open 

competition trading center. The information would also be available to the Commission and its 

staff, and to other regulators. Also, the originating broker’s written policies and procedures 

                                                
338  See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing the public availability of information obtained by 

the Commission). 



178 

 

pursuant to Proposed Rule 615(e)(3) would be available to the Commission and its staff, and to 

other regulators. 

 

An NMS Stock ATSs’ written policies and procedures to comply with Proposed Rule 

600(b)(64)(ii)(D), if necessary, to qualify as an open competition trading center eligible to 

operate a qualified auction pursuant to Proposed Rule 615(d)(1) would be available to the 

Commission and its staff, and to other regulators. As described above, NMS Stock ATSs are also 

required to publicly disclose certain information on Form ATS-N.339 

G. Retention Period for Recordkeeping Requirements 

Proposed Rule 615 and the related amendments, would not establish any new record 

retention requirements. National securities exchanges and national securities associations are 

required to retain records and information pursuant to 17 CFR 240.17a-1 (“Rule 17a-1”), and 

broker-dealers are required to retain records and information pursuant to 17 CFR 240.17a–4 

(“Rule 17a-4”). 

H. Request for Comments 

The Commission requests comment on whether the estimates for burden hours and costs 

are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (1) 

evaluate whether the proposed collections of information are necessary for the proper 

performance of the functions of the Commission, including whether the information would have 

practical utility; (2) evaluate the accuracy of the Commission’s estimate of the burden of the 

proposed collections of information; (3) determine whether there are ways to enhance the 

quality, utility, and clarity of the information to be collected; and (4) determine whether there are 

                                                
339  Supra note 278. 



179 

 

ways to minimize the burden of the collections of information on those who are to respond, 

including through the use of automated collection techniques or other forms of information 

technology. 

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 Secretary, Securities and Exchange 

Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File Number S7-

31-22. 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 S7-31-22 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. 

VII. Economic Analysis 

A. Introduction 

The Commission is mindful of the economic effects that may result from Proposed Rule 

615, and the amendments proposed in this release (the “Proposal”), including the benefits, costs, 

and the effects on efficiency, competition, and capital formation. Exchange Act section 3(f) 

requires the Commission, when it is engaged in rulemaking pursuant to the Exchange Act 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 will promote 



180 

 

efficiency, competition, and capital formation.340 In addition, Exchange Act section 23(a)(2) 

requires the Commission, when making rules pursuant to the Exchange Act, to consider among 

other matters the impact that any such rule would have on competition and not to adopt any rule 

that would impose a burden on competition that is not necessary or appropriate in furtherance of 

the purposes of the Exchange Act.341 The following economic analysis identifies and considers 

the costs and benefits—including the effects on efficiency, competition, and capital formation—

that may result from the Proposal. 

Investors participate in capital markets to save for the future, to diversify, and to 

maximize returns given a desired level of risk, among other reasons. This participation can 

involve both trades based on information and trades based on liquidity needs. Many individuals 

participate indirectly in equity markets, such as through mutual funds or through pension funds. 

However, many individuals participate directly in equity markets, and this direct participation 

has grown in recent years.342 While some of this direct participation may be transitory, forces 

operating over the long run, such as technological improvements, may lead the trend to continue.  

This increase in participation, coming on top of various other trends discussed below, 

motivates concern over the current isolation of retail orders. At present, the vast majority of retail 

orders (over 90% of marketable NMS stock orders) are routed to wholesalers, where they are 

                                                
340  See 15 U.S.C. 78c(f). 

341  See 15 U.S.C. 78w(a)(2). 

342  See, e.g., SIFMA Insights, Gauging the New Normal for Volatility, Volumes, Market Levels & Retail 

Investor Participation (May 2021), available at https://www.sifma.org/wp-

content/uploads/2021/05/SIFMA-Insights-Market-Structure-Survey-FINAL-FOR-WEB.pdf; see also 

Jennifer J. Schulp, GameStop and the Rise of Retail Trading, 41 Cato J. 511 (2021). For example, one 

study estimates that retail market share has increased from around 23% (as a percentage of share volume) 

in Jan. 2020 to around 34% by July 2021; see Rosenblatt Securities, How Can the Buy Side Interact with 

Retail Flow? (Feb. 14, 2022), available at https://www.rblt.com/market-reports/how-can-the-buy-side-

interact-with-retail-flow. 

https://www.sifma.org/wp-content/uploads/2021/05/SIFMA-Insights-Market-Structure-Survey-FINAL-FOR-WEB.pdf
https://www.sifma.org/wp-content/uploads/2021/05/SIFMA-Insights-Market-Structure-Survey-FINAL-FOR-WEB.pdf
https://www.rblt.com/market-reports/how-can-the-buy-side-interact-with-retail-flow
https://www.rblt.com/market-reports/how-can-the-buy-side-interact-with-retail-flow181 

 

frequently executed in isolation, on a captive basis.343 This execution is subject to competitive 

forces that apply at the level of average execution quality. Execution of these orders is not 

subject to order-by-order competition that occurs when order interactions are subject to exchange 

protocols. The empirical analysis below suggests that this results in suboptimal execution quality 

compared to an alternative market structure in which the marketable orders of individual 

investors were subject to order-by-order competition.344 While wholesalers generally achieve 

price improvement relative to the NBBO, Commission analysis indicates that there is the 

potential for individual investors to receive additional price improvement in line with the low 

adverse selection risk of individual investor order flow. While acknowledging there is substantial 

uncertainty in the eventual outcome, the Commission estimates that qualified auctions as 

designed by the Proposal would result in additional price improvement for the marketable orders 

of individual investors that could reduce the average transactions costs of these orders by 0.86 

basis points (“bps”) to 1.31 bps.345 The Commission estimates that segmented orders that would 

                                                
343  See analysis in infra Table 3. In the current market structure, retail brokers provide wholesalers with large 

blocks of orders, leaving it to the discretion of wholesalers how to execute each order, consistent with their 

best execution responsibilities. Broker-dealers are required to provide best execution for customer orders, 

both pursuant to common law and FINRA rules. See discussion of broker-dealer best execution 

responsibilities in supra section III.B.2. The obligation for wholesalers to provide best execution is required 

under FINRA Rule 5310 (Best Execution and Interpositioning). See also supra note 133. The Commission 

is also separately proposing a new rule addressing the best execution obligations of broker-dealers. See 

Regulation Best Execution Proposal, supra note 130. The Commission encourages commenters to review 

that proposal to determine whether it might affect their comments on this proposal 

344  See infra section VII.B.4 for analysis and discussion of the potential adverse execution quality effects from 

the isolation of individual investor marketable orders. 

345  See analysis in Table 19 and corresponding discussion in infra section VII.C.1.b. This estimate accounts 

only for potential changes in individual order transaction costs and assumes the PFOF wholesalers 

currently pay to retail brokers would be converted into additional price improvement for the individual 

investor order, and does not include costs that may arise in the form of potential increases in (or the return 

of) commissions retail brokers charge to individual investors or other reductions in the services that retail 

brokers currently offer. See infra note 514 for further discussion. 



182 

 

be eligible to be included in qualified auctions could account for 7.3%346 to 10.1%347 of total 

executed dollar volume. Given this estimate, the Commission preliminarily estimates that the 

Proposal could potentially result in a total average annual savings in individual investor 

transaction costs ranging from $1.12 billion to $2.35 billion.348 These estimated gains would be 

generated primarily through increased competition to supply liquidity to marketable orders of 

individual investors, which in turn would lower transaction costs for individual investors, 

potentially enhance order execution quality for institutional investors, and improve price 

discovery. More generally, it would broaden the set of market participants that directly interact 

with individual investor orders of NMS stocks.349 For example, Commission analysis indicates 

that there is often liquidity available at the NBBO midpoint on exchanges or NMS Stock ATSs 

when a wholesaler executes the marketable orders of individual investors at prices less favorable 

(for the customer) than the NBBO midpoint.350 Qualified auctions would act as a coordination 

mechanism and make the submitters of these resting midpoint orders aware there was an 

individual investor order they could potentially trade with. By increasing competition and 

enhancing the direct exposure of individual investor orders to a broader spectrum of market 

                                                
346  See infra note 533. 

347  See infra note 535. 

348  See analysis in Table 19 and corresponding discussion in infra section VII.C.1.b.  

349 As discussed above, Proposed Rule 615 covers only NMS stocks, and as such, the economic analysis 

includes quantitative and qualitative analysis of only NMS stocks.  

350  Commission analysis of CAT data in infra Table 20 found that, on average, 51% of the shares of individual 

investor marketable orders internalized by wholesalers are executed at prices less favorable than the NBBO 

midpoint. Out of these individual investors shares that were executed at prices less favorable than the 

midpoint, on average, 75% of these shares could have hypothetically executed at a better price against the 
non-displayed liquidity resting at the NBBO midpoint on exchanges and NMS Stock ATSs. See infra 

section VII.C.1.b for further discussion on the analysis in Table 20. 



183 

 

participants, the Proposal would help achieve the objectives for an NMS set forth in section 11A 

of the Exchange Act.351 

The Proposal could have additional benefits with respect to trading costs, liquidity, and 

capital formation, though the Commission acknowledges that these are uncertain. The large 

percentage of individual investor orders executed off-exchange confers a substantial competitive 

advantage on wholesalers and other market makers with a significant presence both on and off-

exchange, as they observe order flow more quickly and in a more granular fashion than others. 

This advantage contributes to asymmetric information and increased adverse selection on 

exchanges. Such adverse selection may reduce market quality for all participants and may 

ultimately reduce efficiency and lower capital formation.  

The Commission acknowledges considerable uncertainty in the costs that would arise 

from Proposed Rule 615, due to whether the current market practice of routing through 

wholesalers would persist. First, the Proposal would likely cause wholesalers and some retail 

brokers to incur significant adjustment costs to their operations, as well as a possible decline in 

profitability. The Proposal could also result in costs to individual investors, such as some retail 

brokers potentially resuming charging commissions for NMS stock trades, although the 

likelihood of this may be low.352 There may also be an increase in trading costs for retail broker 

customers that carry greater adverse selection risks and individual investors whose orders would 

not meet the definition of a segmented order because they averaged 40 or more daily trades in 

NMS stocks over the six preceding calendar months.353 Retail brokers could also experience 

costs from wholesalers reducing the amount of PFOF they pay to retail brokers or from reducing 

                                                
351  See discussion in supra section III.A. 

352  See discussion of potential changes in retail broker commissions in infra section VII.C.2.b.ii.  

353  See supra note 186 and corresponding text discussing the definition of “segmented order.” 



184 

 

or charging for the order handling services they offer to retail brokers, which could ultimately be 

passed on to individual investors. 

Open competition trading centers would also face costs associated with creating qualified 

auctions, as would broker-dealers and trading centers that would incur costs related to 

establishing policies and procedures for identifying and handling segmented orders and 

identifying the originating retail brokers that submit segmented orders.354 There would also be 

compliance costs faced by the respective NMS plans and FINRA to update the consolidated 

market data feed and ADF to broadcast qualified auction messages. There may also be a decrease 

in displayed liquidity if qualified auctions attract liquidity away from exchange Limit Order 

Books (“LOBs”). However, because the majority of individual investor orders are already 

segmented from exchange LOBs, there is the potential that the effect of qualified auctions on 

LOB liquidity may not be significant.355  

The Commission recognizes that there would likely be significant competitive effects 

associated with the introduction of qualified auctions as mandated by Proposed Rule 615. 

Qualified auctions could reduce wholesaler market share for the execution of the orders of 

individual investors, which could result in the transfer of revenue and profit from wholesalers to 

other market participants that end up supplying more liquidity to the marketable orders of 

individual investors. Proposed Rule 615 could also affect competition in the market for trading 

services by enhancing the competitive position of exchanges and ATSs that operate qualified 

auctions relative to wholesalers as well as exchanges and ATSs that do not meet the criteria to 

                                                
354  If NMS Stock ATSs opted to operate qualified auctions, they may also incur costs to update their business 

models and systems in order to meet the requirements to be an open competition trading center. See infra 

section VII.C.2.e. 

355  See discussion on the effects of the Proposal on exchange LOB liquidity in infra section VII.C.2.g. 



185 

 

operate qualified auctions. The introduction of qualified auctions would likely lead to a reduction 

of PFOF in equity markets, which in turn may weaken the competitive position of retail brokers 

that are dependent on PFOF revenue but strengthen the competitive position of retail brokers that 

are not. In addition, Proposed Rule 615 could also increase competition for market access among 

routing broker-dealers if the competitive position of wholesalers declines, and retail brokers that 

had previously relied on wholesalers for routing services, choose to route their own orders to 

qualified auctions. 

The Commission has considered the economic effects of the Proposal and wherever 

possible, the Commission has quantified the likely economic effects of the Proposal. The 

Commission is providing both a qualitative assessment and quantified estimates of the potential 

economic effects of the Proposal where feasible. The Commission has incorporated data and 

other information to assist it in the analysis of the economic effects of the Proposal. 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, quantification is not practicable due to the number and 

type of assumptions necessary to quantify certain economic effects, which render any such 

quantification unreliable. The Commission’s inability to quantify certain costs, benefits, and 

effects does not imply that the Commission believes such costs, benefits, or effects are less 

significant. The Commission requests that commenters provide relevant data and information to 

assist the Commission in quantifying the economic consequences of the Proposal.  



186 

 

B. Baseline 

The baseline against which the costs, benefits, and the effects on efficiency, competition, 

and capital formation of the Proposal are measured consists of the existing routing practices and 

execution quality for the marketable orders of individual investors, the current state of 

interactions between institutional investors and the orders of individual investors, and the current 

business practices of retail brokers. These aspects of the baseline are framed by the statutory and 

regulatory baseline described above.356 

Retail brokers route most of their customers’ marketable order flow to wholesalers.357 

Wholesalers do not typically directly charge retail brokers for their order routing and execution 

services. In fact, they may pay some retail brokers for the opportunity to handle their order flow 

with PFOF. Typically, wholesalers’ vertical integration of routing and execution services for the 

orders of individual investors provides them flexibility with regard to their handling of order 

flow. They utilize sophisticated algorithmic trading technology to deliver their services.358 In 

                                                
356  The regulatory baseline includes the changes to the current arrangements for consolidated market data in 

the MDI Rules; but those amendments have not been implemented, so they likely have not affected market 

practice. See supra section III.B.1 and infra section VII.B.7. Where implementation of the changes may 

affect certain numbers in the baseline, the description of the baseline below notes those effects.  

357  Commission analysis of broker-dealer Rule 606 report order routing data in infra Table 3 indicates that 

retail brokers route over 90% of their marketable orders to wholesalers.  

358 Wholesalers, similar to OTC market makers and exchange liquidity suppliers must establish connections 

with the numerous venues in which they wish to operate and provide liquidity. They also typically design 

smart order routers that can locate and provide liquidity in real time, as well as maintain fast data 
processing capabilities that enable them to respond to market conditions while abiding by the relevant trade 

execution regulations. Wholesalers also face the costs associated with price risk. As wholesalers trade 

against market participants, they takes positions at the opposite side, accumulating inventory. Holding 

inventory exposes wholesaler profits to inventory (price) risk, where the value of inventory, and hence, that 

of the wholesaler’s holdings may fluctuate as security prices vary. Scaling up the size of the business to 

ensure steady incoming flow from opposite sides of the markets is a common strategy pursued by 

wholesalers. This strategy enables them to execute buy and sell transactions, offsetting order flow from 

opposite sides, reducing the possibility of accumulating prolonged unwanted inventory. However, among 

other costs, scaling up requires more comprehensive, efficient connectivity networks and adds to the costs 

of establishing and maintaining such networks. 



187 

 

particular, wholesalers determine which orders to internalize (i.e., execute in a principal 

capacity) and which to execute in a riskless principal or agency capacity.359 Commission analysis 

indicates that wholesalers internalize over 90% of the dollar volume from individual investor 

marketable orders that are routed to them and executed.360 

The wholesaler business model relies in part on the ability to segment the order flow of 

individual investors, which typically have lower adverse selection risk than the orders of other 

types of market participants.361 Wholesalers are market makers that can identify orders with low 

adverse selection risk.362 Through segmentation, wholesalers typically internalize marketable 

orders with lower adverse selection risk and generally execute them at prices better than the 

current NBBO, i.e., because of segmentation, wholesalers are typically able to execute the 

marketable orders of individual investors at better prices than these orders would receive if they 

were routed to an exchange. An analysis of marketable NMS stock orders presented in Table 10 

below indicates that the orders that wholesalers internalize present lower adverse selection risk 

and receive higher execution quality relative to marketable orders wholesalers receive and 

execute in a riskless principal or agency capacity.363 Furthermore, results from Table 13 below 

                                                
359  See discussion in infra section VII.B.5.a. 

360  See analysis in infra Table 10.  

361  Wholesalers and other liquidity providers (including other market-makers) face adverse selection risk when 

they accumulate inventory, for example by providing liquidity to more informed traders, because of the risk 

of market prices moving away from wholesalers and other market makers before they are able to unwind 

their positions. Wholesalers and other market makers are usually not privy to the motives or information of 

the investors with whom they are trading. As such, should the liquidity provider trade with an investor 

possessing short-lived price information about the security price, it is exposing its inventory to adverse 

selection risk. Hence, liquidity providers, including wholesalers and other market-makers normally choose 
their trading strategies to minimize their interaction with order flow with increased adverse selection risk. 

Wholesalers do this by attracting marketable orders of individual investors, known to be the order flow 

with the lowest adverse selection risk..  

362  See infra note 405 and corresponding discussion. Adverse selection risk is based on various characteristics 

of the order, including the identity of the originating broker. 

363  See analysis in infra Table 10. 



188 

 

show that wholesalers internalize a lower share of orders from retail brokers with the highest 

adverse selection risk. Additional results364 show that, relative to orders executed on exchanges, 

orders internalized by wholesalers are associated with lower price impacts (i.e., lower adverse 

selection risk),365 lower effective half-spreads (i.e., higher price improvement),366 and higher 

realized half-spreads (i.e., higher potential profitability).367 

Though wholesaler internalization generates price improvement for individual investors 

relative to the NBBO, the Commission posits that the potential isolation of marketable order 

flow routed to wholesalers results in suboptimal price improvement for individual investor orders 

                                                
364  See infra Table 6 and infra Table 7 and corresponding discussion in section VII.B.4 for a comparison of 

exchange and wholesaler execution quality. 

365  See supra notes 47-48 and accompanying text for a definition and discussion of price impact as a measure 

of adverse selection risk. By measuring the difference between the NBBO midpoint at the time of execution 

and the NBBO midpoint some fixed period of time after the transaction (e.g., one minute), price impact 

measures the extent of adverse selection costs faced by a liquidity provider. For example, if a liquidity 

provider provides liquidity by buying shares from a trader who wants to sell, thereby accumulating a 

positive inventory position, and then wants to unwind this inventory position by selling shares in the 

market, it will incur a loss if the price has fallen in the meantime. In this case, the price impact measure will 

be positive, reflecting the liquidity provider’s exposure to adverse selection costs. 

366  See also results in Thomas Ernst & Chester Spatt, Payment for Order Flow and Asset Choice (last revised 

Mar. 13, 2022) (unpublished manuscript), available at https://ssrn.com/abstract=4056512 (retrieved from 

SSRN Elsevier database) (hereinafter “Ernst and Spatt Working Paper”). See supra note 46 and 

accompanying text for a definition and discussion of effective half-spreads. The effective half-spread is 

calculated by comparing the trade execution price to an estimate of the stock’s value (i.e., the midpoint of 

the prevailing NBBO at the time of order receipt) and thus captures how much more than the stock’s 

estimated value a trader has to pay for the immediate execution of their order. The effective spread will be 

smaller (or less positive) when the execution price is closer to the NBBO midpoint, reflecting price 

improvement received on that order. See, e.g., Bjorn Hagströmer, Bias in the Effective Bid-Ask Spread, 

142 J. Fin. Econ. 314 (2021). For the remainder of this analysis, we will use the term “effective spread” to 

refer to the “effective half-spread” as defined in supra section II.D.1. 

367  See supra notes 49-50 and accompanying text for a definition and discussion of realized half-spreads. See, 

e.g., Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75423-75424 (Dec. 1, 2000) 

(Disclosure of Order Execution and Routing Practices) (“The smaller the average realized spread, the more 

market prices have moved adversely to the market center's liquidity providers after the order was executed, 

which shrinks the spread ‘realized’ by the liquidity providers. In other words, a low average realized spread 

indicates that the market center was providing liquidity even though prices were moving against it for 

reasons such as news or market volatility.”); see also Larry Harris, Trading and Exchanges: Market 

Microstructure for Practitioners (2003) at 286. See infra note 420 discussing the limitations of realized 

spreads for estimating the profits earned by market makers. For the remainder of this analysis, we will use 

the term “realized spread” to refer to the “realized half-spread” as defined in supra section II.D.1.  

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relative to what the Commission estimates would be achieved under the Proposal. Specifically, 

due to the isolation of this order flow by wholesalers from order-by-order competition, the 

amount of price improvement individual investors receive does not fully compensate for the 

lower adverse selection risk of their orders. Commission analyses presented below provide 

results that support this point.368 

The baseline section below is organized as follows. The baseline first discusses relevant 

features of trading services, including segmentation and interactions between institutional and 

retail order flows. Next, the baseline presents the Commission’s empirical findings on execution 

quality. The section ends with a discussion of retail broker services and rules addressing 

consolidated market data. 

 

Investors trade for a variety of reasons, whether because of informational advantages or 

because of hedging and liquidity needs. In an idealized competitive market, these investors 

would meet and trade amongst themselves, without the need of an intermediary. In such cases, 

trades would occur at the midpoint and neither side would pay the spread. In real-life markets, 

not all investors meet at the same time. Furthermore, investors may avoid trading with one 

another if they believe their counterparty has information that they do not, as opposed to trading 

for liquidity reasons. Moreover, investors often utilize the technology and services of a broker-

dealer in order to find and interact efficiently with the trading interest of other investors. For 

these reasons, there are broker-dealers who incur fixed costs for routing orders and charge a 

                                                
368  See infra sections VII.B.4 and VII.B.5. 



190 

 

spread for acting as a dealer and supplying liquidity when end investors are not available to 

directly trade with each other. 

Market centers compete to attract order flow from these broker-dealers. As shown in 

Table 1, in Q1 of 2022, NMS stocks were traded on 16 registered securities exchanges,369 and 

off-exchange at 32 NMS Stock ATSs and at over 230 other FINRA members, including OTC 

market makers.370 OTC market makers include the 6 wholesalers that internalize the majority of 

individual investor marketable orders.371 These numerous market centers match traders with 

                                                
369  Most of these 16 registered securities exchanges are owned by three exchange groups. Currently, the CBOE 

exchange group owns: Cboe BYX Exchange, Inc. (“Cboe BYX”), Cboe BZX Exchange, Inc. (“Cboe 

BZX”), Cboe EDGA Exchange, Inc. (“Cboe EDGA”), and Cboe EDGX Exchange, Inc. (“Cboe EDGX”); 

the Nasdaq exchange group owns: Nasdaq BX, Inc. (“Nasdaq BX”), Nasdaq PHLX LLC (“Nasdaq Phlx”), 

and The Nasdaq Stock Market LLC (“Nasdaq”); and the NYSE exchange group owns: NYSE, NYSE 

American LLC (“NYSE American”), NYSE Arca, Inc. (“NYSE Arca”), NYSE Chicago, Inc. (“NYSE 

CHX”), and NYSE National, Inc. (“NYSE National”). Other registered securities exchanges that trade 

NMS stocks and do not belong to one of these exchange groups include: Investors Exchange LLC (“IEX”), 

Long-Term Stock Exchange, Inc. (“LTSE”), MEMX LLC (“MEMX”), and MIAX Pearl, LLC (“MIAX 

PEARL”).The Commission approved rules proposed by BOX Exchange LLC (“BOX”) for the listing and 
trading of certain equity securities that would be NMS stocks on a facility of BOX known as BSTX LLC 

(“BSTX”), but BSTX is not yet operational. See Securities Exchange Act Release Nos. 94092 (Jan. 27, 

2022), 87 FR 5881 (Feb. 2, 2022) (SR-BOX-2021-06) (approving the trading of equity securities on the 

exchange through a facility of the exchange known as BSTX); 94278 (Feb. 17, 2022), 87 FR 10401 (Feb. 

24, 2022) (SR-BOX-2021-14) (approving the establishment of BSTX as a facility of BOX). BSTX cannot 

commence operations as a facility of BOX until, among other things, the BSTX Third Amended and 

Restated Limited Liability Company Agreement approved by the Commission as rules of BOX is adopted. 

Id. at 10407. 

370  See supra section II.B for further details on the types of trading centers that execute trades in NMS stocks. 

See also Form ATS-N Filings and Information (for a list of ATSs that trade NMS stocks and have a Form 

ATS-N filed with the Commission), available at https://www.sec.gov/divisions/marketreg/form-ats-n-

filings.htm. Some academic studies attribute the fragmented nature of the market for NMS stocks, in part, 
to certain provisions of Regulation NMS. See, e.g., Maureen O’Hara & Mao Ye, Is Market Fragmentation 

Harming Market Quality?, 100 J. Fin. 459 (2011); Amy Kwan, Ronald Masulis & Thomas H. McInish, 

Trading Rules, Competition for Order Flow and Market Fragmentation, 115 J. Fin. 330 (2015). 

371  The six OTC market makers that are classified as wholesalers for purposes of this release are the OTC 

market makers to which the majority of marketable orders originating from retail brokers were routed as 

identified from information from retail broker Rule 606(a)(1) reports from Q1 2022. These market makers 

also reported executing a significant percentage of shares routed to them on their Rule 605 reports. Rule 

606(a)(1) requires broker-dealers to produce quarterly public reports containing information about the 

venues to which the broker-dealer regularly routed non-directed orders for execution, including any 

payment relationship between the broker-dealer and the venue, such as any PFOF arrangements. See 17 

CFR 242.606(a)(1). 

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counterparties, provide a framework for price negotiation and/or provide liquidity to those 

seeking to trade. 

Table 1: NMS Stock Traded Share Volume Percentage of all NMS Stocks by Market Center Type 

Market Center Type Venue Cnt Share Volume Pct 
Off-Exchange Share 

Volume Pct 

Exchanges 16 59.7%  

NMS Stock ATSs 32 10.2% 25.2% 

Wholesalers a 6 23.9% 59.4% 

Other FINRA Members 232 6.3% 15.6% 

This table reports the percentage of all NMS stock executed share volume and the percentage of NMS stock share 

volume executed off-exchange for different types of market centers for Q1 2022. Venue Cnt lists the number of 

venues in each market center category. Share Volume Pct is the percentage of all NMS stock share volume (on 

plus off-exchange) executed by the type of market center. Off-Exchange Share Volume Pct is the percentage of 

off-exchange share volume executed by the type of market center. Exchange share volume and total market 

volume are based on CBOE Market Volume Data on monthly share volume executed on each exchange and share 
volume reported in FINRA Trade Reporting Facilities (TRFs).b NMS Stock ATS, wholesaler and FINRA 

member share volume are based on monthly FINRA OTC Transparency data on aggregated NMS stock trading 

volume executed on individual ATSs and over-the-counter at Non-ATS FINRA members.c Off-Exchange Share 

Volume Pct is calculated by dividing the NMS Stock ATS, wholesaler and FINRA member share volume from 

the FINRA Transparency Data by the total TRF share volume reported in CBOE Market Volume Data. 
a See supra note 371 for details regarding how FINRA member OTC market makers are classified as wholesalers 

for purposes of this release. 
b Cboe, U.S. Historical Market Volume Data, available at 

https://cboe.com/us/equities/market_statistics/historical_market_volume/. Trade Reporting Facilities (TRFs) are 

facilities through which FINRA members report off-exchange transactions in NMS stocks, as defined in SEC 

Rule 600(b)(47) of Regulation NMS. See https://www.finra.org/filing-reporting/trade-reporting-facility-trf. 
c FINRA OTC (Non-ATS) Transparency Data Monthly Statistics, available at 
https://otctransparency.finra.org/otctransparency/OtcData; FINRA ATS Transparency Data Monthly Statistics, 

available at https://otctransparency.finra.org/otctransparency/AtsBlocksDownload. The FINRA OTC (Non-ATS) 

Transparency Data may not contain all share volume transacted by a wholesaler or FINRA member because 

FINRA aggregates security-specific information for firms with “de minimis” volume outside of an ATS and 

publishes it on a non-attributed basis. 

Market centers’ primary customers are broker-dealers that route their own orders or their 

customers' orders for execution. Market centers may compete with each other for these broker-

dealers’ order flow on a number of dimensions, including execution quality. They also may 

innovate to differentiate themselves from other trading centers to attract more order flow. While 

registered exchanges cater to a broader spectrum of investors, ATSs and OTC market makers, 

including wholesalers, tend to focus more on providing trading services to either institutional or 

individual investor orders. 



192 

 

Table 1 displays NMS stock share volume percentage by market center type for Q1 2022. 

Exchanges execute approximately 60% of total share volume in NMS stocks, while off-exchange 

market centers execute approximately 40%. The majority of off-exchange share volume is 

executed by wholesalers, who execute almost one quarter of total share volume (23.9%)372 and 

about 60% of off-exchange share volume.373 NMS Stock ATSs execute approximately 10% of 

total NMS stock share volume and 25% of off-exchange share volume. Other FINRA members, 

besides wholesalers and ATSs, execute approximately 15% of off-exchange share volume. 

There is evidence that the percentage of trading volume executed off-exchange has been 

increasing over time. One industry group study found that volume traded off-exchange as a 

percent of total volume has increased since 2018, when off-exchange trading was 36.8% of total 

volume.374 According to another study by an exchange, an increase in orders executed by off-

exchange venues other than ATSs has been the driving factor behind this increase in off-

exchange trading, which has been particularly significant for lower-priced stocks.375 At the same 

                                                
372  Of the six wholesalers identified in Q1 2022, two accounted for approximately 66% of wholesalers’ total 

executed share volume of NMS stocks. One study finds that the concentration of wholesaler internalization, 

as measured by the Herfindahl-Hirschman Index (HHI) of share volume executed across wholesalers, has 

increased from 2018 to 2021. See Edwin Hu & Dermot Murphy, Competition for Retail Order Flow and 

Market Quality (last revised Oct. 7, 2022) (unpublished manuscript), available at 

https://ssrn.com/abstract=4070056 (retrieved from Elsevier database). 

373  The share volume reported for wholesalers in FINRA OTC Transparency Data includes both individual 

investor orders executed by wholesalers in a principal capacity as well as other orders executed by 

wholesalers in a principal capacity, such as institutional orders executed on their SDPs. It does not include 
share volume that they executed in a riskless principal capacity or share volume that was routed and 

executed at another market center. 

374  See SIFMA Insights, Analyzing the Meaning Behind the Level of Off-Exchange Trading (Sept. 2021), 

available at https://www.sifma.org/wp-content/uploads/2021/09/SIFMA-Insights-Analyzing-Off-

Exchange-Trading-09-2021.pdf. The study found off-exchange trading to be 44.2% of total YTD trading 

volume as of Sept. 2021. 

375  See NYSE Data Insights, Market Volume and Off-Exchange Trading: More than a Retail Story (June 15, 

2020), available at https://www.nyse.com/data-insights/market-volume-and-off-exchange-trading. In 

particular, the study found that, for stocks priced lower than $5, off-exchange trading market share 

increased from 45.4% in Oct. 2019 to 54.8% in June 2020, and that ATS market share decreased from 

https://ssrn.com/abstract=4070056
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time, some have highlighted a decline in liquidity displayed at or near the NBBO on 

exchanges.376 Industry participants have raised concerns regarding a “monopolistic 

environment,” in which information off-exchange becomes sufficiently concentrated and 

determinative as to widen spreads on exchange.377 For example, a liquidity provider deciding 

whether to rest an order on the book would face the possibility of a wholesaler or other off-

exchange market maker gleaning information from the posted liquidity to determine a price to 

execute off-exchange that accounts for the lack of adverse selection risk in off-exchange flow.378 

This limits the execution possibilities on exchange. On the other hand, any posted liquidity 

(which grants an option to liquidity demanders or to those engaged in latency arbitrage) is 

vulnerable to being "picked off"—namely executed against exactly when the price is (in the case 

of a resting buy order) moving lower or (in the case of a sell order) moving higher. These 

dynamics lower the incentives to post liquidity on exchange. 

Exchanges (via their rules) and ATSs determine how orders compete with each other, 

wherein liquidity suppliers set prices and wait for execution at their prices by liquidity 

demanders. This interaction between liquidity providers and demanders encompasses order-by-

                                                
14.2% to 11.5% of consolidated average daily volume and non-ATS OTC market share increased from 

20.5% to 27.8% over the same time period.  

376  See, e.g., Gunjan Banerji, Buying or Selling Stocks? It Isn’t Always Easy, Wall St., J., Jan. 2, 2020, 

showing a greater than 90% reduction in the number of shares available at the best prices in the SPDR S&P 

500 ETF from 2007 to 2018, as one example of the overall reduction in market liquidity. Furthermore, in a 

comment letter to the Commission responding to comments on an SRO proposed rule change, an exchange 

found that the COVID crisis lead to a further substantial decrease in the depth of liquidity at the NBBO, as 

the average displayed quote size declined by 69% from Jan. to Mar. 2020 for S&P 500 stocks. See Letter 

from John Ramsay, Chief Market Policy Officer, Investors Exchange LLC to Ms. Vanessa Countryman, 
Secretary, U.S. Securities and Exchange Commission, dated May 10, 2020 (File No. SR-IEX-2019-15), 

available at https://www.sec.gov/comments/sr-iex-2019-15/sriex201915-7169827-216633.pdf.  

377        See Hitesh Mittal & Kathryn Berkow, The Good, The Bad & The Ugly of Payment for Order Flow (May 3, 

2021), available at https://bestexresearch.com/the-good-the-bad-the-ugly-of-payment-for-order-flow/. 

378        Mitigating this information asymmetry is that off-exchange trades also print to a consolidated post-trade 

tape, though with latency compared with on-exchange trades. 

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order competition. Unlike exchanges, for which each exchange’s rules determine competition in 

a non-discretionary fashion, wholesalers execute or route orders in a discretionary fashion.379 

While some orders may be routed to a central limit order book against which institutional 

investors may execute (on the discretion of the wholesaler), institutional investors generally 

consider order flow routed to a wholesaler to be “inaccessible.”380 

As a proxy for expected execution quality, quoted prices are a dimension on which 

exchanges compete to attract order flow. Specifically, exchanges are required to post the best bid 

and ask prices available on the exchange at that time381, and broker-dealers can observe those 

prices and choose to route orders to the exchange posting the best prices at a given point in time. 

However, others who provide trading services, such as ATSs and OTC market makers, do not 

usually compete on this dimension.382 In other words, wholesalers generally do not compete for 

order flow by posting competitive prices the way exchanges do. They do not display or otherwise 

advertise the prices at which they are willing to internalize individual investor orders at a given 

point in time. This suggests that wholesalers attract order flow by offering retail brokers more 

                                                
379  A study estimates that the volume of individual investor orders executed by wholesalers accounted for 

approximately 16% to 17% of consolidated share volume during Q1 2022. See Rosenblatt Securities, An 

Update on Retail Market Share in US Equities (June 24, 2022), available at https://www.rblt.com/market-

reports/trading-talk-an-update-on-retail-market-share-in-us-equities. However, wholesalers are not 

completely focused on individual investor order flow and some do offer services to institutional order flow. 

See infra section VII.B.3 for a discussion of their interaction with institutional order flow. 

380 See supra note 37 (citing Jennifer Hadiaris, Cowen Market Structure: Retail Trading — What’s going on, 

what may change, and what can you do about it?, Cowen (Mar. 23, 2021), available at 

https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-what-can-
institutional-traders-do-about-it/). Further, wholesalers are also not subject to a statutory or regulatory 

requirement to provide fair access. See supra section III.B.3 for further discussion of requirements that do 

and do not apply to wholesalers. 

381  See Rule 602 of Regulation NMS. 

382  ATSs typically compete for institutional order flow by offering innovative trading features such as distinct 

trading protocols and segmentation options. They may also compete on fees. In addition, they could include 

their ATS access in the broader set of bundled services that the broker-dealer director of the ATS offers to 

their institutional investors. 

https://www.rblt.com/market-reports/trading-talk-an-update-on-retail-market-share-in-us-equities
https://www.rblt.com/market-reports/trading-talk-an-update-on-retail-market-share-in-us-equities
https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-what-can-institutional-traders-do-about-it/
https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-what-can-institutional-traders-do-about-it/


195 

 

than just competitive prices at a point in time on a specific order. Instead, wholesalers generally 

attract order flow by offering to on average execute orders at prices that are better than displayed 

prices. Additionally, wholesalers bundle their market access services with execution services, 

thereby vertically fully integrating order handling and execution services for their retail broker 

customers. 

 

Individual investor orders typically carry lower adverse selection risk, in part because 

individual investors may have less information on market conditions than other market 

participants and in part because their orders tend to be small. Both of these factors make 

individual investor orders less likely to be followed by orders in the same direction.383 The lower 

adverse selection risk of individual investor orders makes them more valuable for segmentation 

by liquidity providers that want to execute these orders in a principal capacity, since they are less 

costly to liquidity providers such as wholesalers to execute (i.e., have lower price impacts) than 

orders with higher adverse selection risk. Due to this lower cost, wholesalers are able to provide 

price improvement to these orders and still earn higher profits, as discussed in supra section 

II.D.2. 

Regulation NMS allows an order to be executed off-exchange, provided that an off-

exchange trading venue executes the order at a price equal to the NBBO or better.384 To the 

extent that a liquidity provider is able to segment385 low-risk individual investor order flow, this 

                                                
383  While this characterization of individual orders is generally true, there are also individual investors that are 

highly sophisticated and informed of market conditions. See infra section VII.B.5.b for an empirical 

analysis and discussion of variation in execution quality based on variation in adverse selection risk of 

retail broker order flow. 

384  See supra section III.B.2.b. 

385  See supra section I for a definition of segmentation. 



196 

 

order flow can be executed against with higher profitability for the liquidity provider. Since 

exchanges are limited in their ability to segment order flow (with the exception of retail liquidity 

programs),386 the ability of off-exchange venues to segment orders is one reason why orders are 

routed off-exchange. Furthermore, off-exchange trading venues are often more flexible in 

determining prices than national securities exchanges.387 

The ability to segment is one reason why many individual investor orders are executed 

off-exchange. Another reason is potential efficiency in outsourcing routing services. Maintaining 

market access at many venues is costly, so broker-dealers have an incentive to use the services of 

other broker-dealers who maintain market access at most, if not all, market centers. Wholesalers 

are the dominant providers of market access for retail brokers and bundle their market access 

services with execution services. Yet another reason arises from economies of scale stemming 

from the information that can be gleaned from large quantities of individual orders.388 Because of 

the profitability in these segmented orders, wholesalers will sometimes pay for them, a practice 

known as payment for order flow. For some retail brokers, this may create an additional 

incentive for routing to the wholesalers. 

 

Most individual investor orders are non-directed, so individual investor order routing 

choices are largely made by retail brokers. Specifically, retail brokers choose how to access the 

market in order to fill their individual investor customers’ orders. Many broker-dealers that 

                                                
386  See infra section VII.B.2.c. 

387  For example, Rule 612 does not prevent wholesalers, after they receive an order from a broker, from 

choosing to execute that order in a transaction at a sub-penny price. See supra note 148 and corresponding 

discussion. 

388  See infra note 406 for a discussion of the informational advantages that routing can provide to wholesalers. 



197 

 

handle customer accounts, including many retail brokers, do not directly access national 

securities exchanges or ATSs for their orders, relying on other broker-dealers to facilitate market 

access for them.389 For example, only members of exchanges or subscribers to (or owners of) 

ATSs can directly access those particular market centers.390 As a result, some broker-dealers that 

are exchange members or ATS subscribers/owners provide access to other brokers-dealers by 

rerouting their customer orders to these market centers. The broker-dealers (including 

wholesalers) who provide market access can choose to compete on a number of dimensions, such 

as by charging lower fees or paying for order flow, by facilitating better execution quality, and 

by providing other valued services.391 

Retail brokers may route to wholesalers because the cost of sending orders to wholesalers 

is lower than the various alternatives available to their customers for market access. While some 

broker-dealers have SORs,392 exchange memberships, and ATS subscriptions, and are thus able 

to provide market access to retail brokers, these other broker-dealers incur costs in handling 

order flow for retail brokers in the form of exchange access fees, ATS access fees, and 

administrative and regulatory costs such as recordkeeping and the risk management controls of 

Rule 15c3-5. While wholesalers could incur some of these marginal costs as well, they benefit on 

the margin from individual investor order flow because they have the option to internalize the 

                                                
389  Providing market access can mean rerouting customer orders and it can also involve sponsoring access for 

the broker to send customer orders directly to a market center.  

390  The number of broker-dealers providing access is thus limited due to the expenses of being an exchange 

member and ATS subscriber. In addition, membership on an exchange also gives the broker-dealer access 

to exchange-provided order routers that re-route orders to other exchanges at a per-order fee. Thus, 

membership on one exchange can effectively provide access, though not directly, to all exchanges. 

391  Although some retail brokers are members of exchanges, they may still prefer to rely on wholesalers’ 

expertise for the handling and routing of their customers’ orders. 

392  Individual investors and professional traders relying on displayed screens to access financial markets 

generally do not have access to these low-latency (algorithmic, high speed) technologies. 



198 

 

most profitable of that order flow, i.e., the individual investor orders with the lowest adverse 

selection risk.393 This ability to capture, identify, and internalize profitable orders from 

individual investors allows wholesalers to provide market access to retail brokers at low explicit 

cost, either by providing PFOF or by not charging retail brokers explicitly for market access. 

This service of obtaining market access on behalf of retail brokers assists retail brokers by 

allowing them to avoid routing expenses (even in cases where the wholesaler further routes the 

order instead of internalizing) or costly liquidity searches, and may increase retail brokers’ 

reliance on wholesalers beyond any payment they receive for routing their order flow to 

wholesalers. 

Indeed, Table 2 shows that retail brokers who accept PFOF (“PFOF brokers”) pay less to 

route their orders to wholesalers than to route them elsewhere.394 In fact, they are paid to route 

their order flow to wholesalers for every order type reported in the table. On average, rates paid 

by wholesalers for both market and marketable limit orders are higher than those paid by 

alternative venues, with wholesalers paying an average of 13 cents per 100 shares for market 

orders and 12.6 cents for marketable limit orders across S&P 500 and non-S&P 500 stocks 

during Q1 2022. In contrast, exchanges, on average, charged PFOF brokers when they routed 

their marketable order flow to exchanges. This likely indicates that most of the volume that 

PFOF brokers sent to exchanges was routed to maker-taker exchanges (where fees are assessed 

on marketable orders).395 Furthermore, since retail brokers that do not accept PFOF (“non-PFOF 

                                                
393  See infra section VII.B.2.b for further discussion of wholesaler internalization. 

394  In Table 2, average payment rates reported in Rule 606 reports for PFOF brokers in S&P 500 stocks and 

non-S&P 500 stocks in Q1 2022 are broken down by trading venue and order type, with rates given in cents 

per 100 shares. 

395  Furthermore, wholesaler rates for non-marketable orders are more than double the rates for marketable 

orders, averaging 27.1 cents per hundred shares compared to 13 cents for market orders and 12.6 cents for 

marketable limit orders. Additionally, Table 2 shows that the average payment rates PFOF brokers receive 



199 

 

brokers”) also incur fees when they route marketable orders to exchanges, they are also 

incentivized to route their marketable order flow to wholesalers, who do not charge them explicit 

costs to route and execute their orders.  

Table 2: Average Rule 606 Payment Rates for Q1 2022 to PFOF Brokers by Trading Venue Type 

  

Market 

Orders 

Marketable 

Limit Orders 

Non-
Marketable 

Limit Orders 

Other 

Orders 

S&P 500 

Exchange -5.9 -23.9 30.9 20.8 

OTC Market Maker- Wholesaler 15.2 21.8 41.1 24.1 

Other 4.5 -0.6 -0.6 7.5 

Non-S&P 500 

Exchange -14.9 -15.3 17.9 16.5 

OTC Market Maker - Wholesaler 12.5 11.8 24.6 10.1 

Other 1.5 -3.7 -4.6 1.5 

Combined 

Exchange -12.4 -15.7 19.3 17.1 

OTC Market Maker - Wholesaler 13.0 12.6 27.1 11.9 

Other 1.7 -3.7 -4.5 2.0 

This table shows the average payment rates (in cents per 100 shares) made from different types of trading venues in Q1 

2022 to 14 retail PFOF brokers from wholesalers based on their Rule 606 reports. The table breaks out average rates 

from exchanges, wholesalers, and other trading venues for market orders, marketable limit orders, non-marketable limit 

orders, and other orders in S&P 500 stocks and non-S&P 500 stocks. Other venues include any other venue to which a 

retail broker routes an order other than a wholesaler or an exchange. The 43 broker-dealers were identified from the 54 

retail brokers used in the CAT retail analysis (see infra note 466). This analysis uses the retail broker’s Rule 606 report if 

it publishes one or the Rule 606 report of its clearing broker if it did not publish a Rule 606 report itself (the sample of 43 

broker-dealer Rule 606 reports include some broker-dealers that were not included in the CAT analysis because some 

clearing broker Rule 606 reports are included). Some broker-dealers reported handling orders only on a not held basis 

and did not have any Rule 606. 

Table 3 reflects that wholesalers dominate the business of providing market access for 

retail brokers and indicates that PFOF is a factor in retail broker routing decisions.396 Data from 

                                                
from routing non-marketable limit orders to wholesalers is greater than the average rates they receive from 

routing them to exchanges. This may be driven by wholesalers passing through exchange rebates for these 

orders, for which they may receive higher volume-based tiering rates compared to retail brokers, back to 

broker-dealers. 

396  Table 3 summarizes order routing decisions of 43 of the most active retail brokers about non-directed 

orders; see infra note 466. Routing choices are summarized separately for 14 PFOF brokers in equity 
markets and non-PFOF brokers. Note that some brokers do not accept PFOF for orders in equities but do 

accept PFOF for orders in options. Consistent with Rule 606, routing statistics are aggregated together in 

Rule 606 reports based on whether the stock is listed in the S&P500 index. Rule 606 reports collect routing 

and PFOF statistics based on four different order types for NMS stocks: (1) market orders, resulting in 

immediate execution at the best available price; (2) marketable limit orders, resulting in immediate 



200 

 

Table 3 indicates that orders of individual investors for NMS stocks are primarily routed to 

wholesalers, although a small fraction of individual investor orders are routed to exchanges and 

other broker-dealers providing market access or other market centers (i.e., ATSs), some of which 

may be affiliated with the broker that received the original order. 

                                                
execution at the best price that is not worse that the order’s quoted limit price; (3) non-marketable limit 

orders whose quoted limit price less aggressive than the NBBO, often preventing immediate execution; and 

(4) all other orders. See supra note 371 for a summary of the requirements of Rule 606(a)(1) of Regulation 

NMS201 

 

Table 3: Retail Broker Order Routing in NMS Stocks for Q1 2022, Combining PFOF and non-PFOF 

Brokers 

Panel A: Non S&P 500 Stocks 

Venue Type Market 
Marketable 

Limit 

Non-

marketable 
Limit 

Other Total 

Other 6.0% 4.7% 3.1% 1.5% 3.6% 

Exchange 0.2% 5.5% 22.5% 0.8% 8.5% 

Wholesaler 93.9% 89.8% 74.4% 97.6% 87.9% 

Total 26.5% 12.6% 33.6% 27.3% 100.0% 

Panel B: S&P 500 Stocks 

Venue Type Market 
Marketable 

Limit 

Non-

marketable 

Limit 

Other Total 

Other 6.6% 5.9% 1.8% 1.7% 3.6% 

Exchange 0.2% 4.6% 25.1% 0.8% 9.1% 

Wholesaler 93.3% 89.6% 73.1% 97.5% 87.3% 

Total 30.6% 9.6% 33.5% 26.4% 100.0% 

This table aggregates Rule 606 reports from retail brokers and shows the percentage of market orders, marketable 
limit orders, non-marketable limit orders, and other orders that retail brokers route to different types of venues in 

Q1 2022. Other venues include any other venue to which a retail broker routes an order other than a wholesaler or 

an exchange. Order type classifications are based on the order types broker-dealers are required to include in their 

Rule 606 reports.  

Table 3 aggregates routing information from 43 broker-dealer Rule 606 reports from Q1 2022. The 43 broker-

dealers were identified from the 54 retail brokers used in the CAT retail analysis (see infra note 466). This 

analysis uses the retail broker’s Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if 

it did not publish a Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include some broker-

dealers that were not included in the CAT analysis because some clearing broker Rule 606 reports are included). 

Some broker-dealers reported handling orders only on a not held basis and did not have any Rule 606 reports. 

Because Rule 606 only include percentages of where their order flow is routed and not statistics on the number of 

orders, the reports are aggregated together using a weighting factor based on an estimate of the number of non-

directed orders each broker-dealer routes each month. The number of orders is estimated by dividing the number 
of non-directed market orders originating from a retail broker in a given month (based on estimates from CAT 

data) by the percentage of market orders as a percent of non-directed orders in the retail broker’s Rule 606 report 

(the weight for a clearing broker consists of the aggregated orders from the introducing brokers in the CAT retail 

analysis that utilize that clearing broker). 

 



202 

 

Table 4: Retail Broker Order Routing in NMS Stocks for March 2022 

Panel A: Non-S&P 500 Stocks 

Non-PFOF Brokers 

Venue Type Market 
Marketable 

Limit 

Non-marketable 

Limit 
Other Total 

Other 24.1% 22.3% 4.2% 41.6% 16.0% 

Exchange <0.1% 25.3% 80.8% 19.7% 39.8% 

Wholesaler 76.0% 52.4% 15.0% 38.8% 44.2% 

Total 38.4% 12.4% 44.2% 5.0% 100.0% 

PFOF Brokers 

Venue Type Market 
Marketable 

Limit 

Non-marketable 

Limit 
Other Total 

Other <0.1% 1.2% 2.8% 0.3% 1.1% 

Exchange 0.2% 1.5% 5.8% 0.2% 2.1% 

Wholesaler 99.7% 97.3% 91.4% 99.5% 96.8% 

Total 24.1% 12.7% 31.5% 31.8% 100.0% 

Panel B: S&P 500 Stocks 

Non-PFOF Brokers 

Venue Type Market 
Marketable 

Limit 

Non-marketable 

Limit 
Other Total 

Other 24.8% 27.0% 3.2% 23.4% 15.4% 

Exchange <0.1% 19.6% 83.2% 8.2% 39.0% 

Wholesaler 75.2% 53.4% 13.6% 68.3% 45.6% 

Total 39.0% 9.2% 43.8% 8.0% 100.0% 

PFOF Brokers 

Venue Type Market 
Marketable 

Limit 

Non-marketable 

Limit 
Other Total 

Other <0.1% 0.5% 1.3% 0.3% 0.6% 

Exchange 0.2% 0.9% 3.4% 0.3% 1.3% 

Wholesaler 99.8% 98.6% 95.3% 99.5% 98.2% 

Total 28.4% 9.7% 30.7% 31.2% 100.0% 

 

This table aggregates Rule 606 reports from PFOF and non-PFOF retail brokers and separately shows the 

percentage of market orders, marketable limit orders, non-marketable limit orders, and other orders PFOF brokers 
and non-PFOF brokers route to different types of venues in Q1 2022. PFOF brokers are retail brokers that receive 

payments for routing marketable orders to wholesalers. Other venues include any other venue to which a retail 

broker routes an order other than a wholesaler or an exchange. Order type classifications are based on the order 

types broker-dealers are required to include in their Rule 606 reports. 



203 

 

Table 4 aggregates routing information from PFOF and non-PFOF broker-dealer Rule 606 reports from Q1 2022. 

Fourteen retail brokers are identified as PFOF brokers that receive payments for routing orders in NMS stocks to 

wholesalers. Non-PFOF brokers are identified as retail brokers that do not receive monetary compensation when 

they route orders in NMS stocks to wholesalers. The 43 broker-dealers were identified from the 54 retail brokers 

used in the CAT retail analysis (see infra note 466). This analysis uses the retail broker’s Rule 606 report if it 

publishes one or the Rule 606 report of its clearing broker if it did not publish a Rule 606 report itself (the sample 
of 43 broker-dealer Rule 606 reports include some broker-dealers that were not included in the CAT analysis 

because some clearing broker Rule 606 reports are included). Some broker-dealers reported handling orders only 

on a not held basis and did not have any Rule 606 reports. Because Rule 606 only include percentages of where 

their order flow is routed and not statistics on the number of orders, the reports are aggregated together using a 

weighting factor based on an estimate of the number of non-directed orders each broker-dealer routes each 

month. The number of orders is estimated by dividing the number of non-directed market orders originating from 

a retail broker in a given month (based on estimates from CAT data) by the percentage of market orders as a 

percent of non-directed orders in the retail broker’s Rule 606 report (the weight for a clearing broker consists of 

the aggregated orders from the introducing brokers in the CAT analysis that utilize that clearing broker). 

 

CAT data analysis indicates that about 80% of the share volume and about 74% of the 

dollar volume of individual investor marketable orders that were routed to wholesalers and 

executed comes from PFOF brokers.397 Data from Table 4 indicate that, while retail brokers who 

accept PFOF from wholesalers tend to send more of their orders to those wholesalers, 

wholesalers even dominate the market access services for non-PFOF brokers, though non-PFOF 

brokers route a significantly lower fraction (i.e., 75.2% to 76%) of their market orders to 

wholesalers, compared to 99.7% to 99.8% of market orders for PFOF brokers. Moreover, non-

PFOF brokers route 24.1% to 24.8% of their market orders to other non-exchange market 

centers, e.g., ATSs, while PFOF brokers route less than 1% of their market orders to these 

market centers. However, regardless of whether the retail broker accepts PFOF, the order type, or 

the S&P500 index inclusion of the stock,398 Table 3 shows that retail brokers route over 87% of 

their customer orders to wholesalers.  

This result suggests that, while PFOF is an important factor in retail brokers routing 

decisions, wholesalers likely also compare favorably to other market access centers (including 

                                                
397  See infra Table 14. 

398  Rule 606 reports require that broker-dealers separate their disclosure information for S&P 500 stocks, non-

S&P 500 stocks, and options. 



204 

 

retail brokers pursuing their own market access) along other dimensions. The routing behavior in 

Table 4 may, in part, reflect a tendency of non-PFOF brokers to route individual investor orders 

to market centers such as their own ATSs for mid-point execution and the lack of an affiliated 

ATS for PFOF brokers. However, even broker-dealers with their own ATSs do not route the 

majority of their individual investor order flow to those ATSs and typically do not internalize 

order flow. Further, retail brokers with membership on multiple exchanges primarily route their 

marketable orders to wholesalers. These results could point to a lower marginal cost of routing to 

wholesalers relative to other routing and execution alternatives. Table 5 below shows that 

wholesalers appear to compare favorably to exchanges in the execution quality of orders routed 

to them, suggesting that execution quality could be another key factor in the decision of retail 

brokers to route to wholesalers.399 In particular, marketable orders routed to wholesalers appear 

to have higher fill rates, lower effective spreads, and lower E/Q ratios.400 These orders are also 

more likely to receive price improvement and, conditional on receiving price improvement, 

receive greater price improvement when routed to wholesalers as compared to exchanges. 

In addition, wholesalers may provide additional valuable services to retail brokers that 

route order flow to them. Based on staff experience, the Commission understands that 

wholesalers are more responsive to retail brokers that provide them with order flow, including, 

for example, following customer instructions not to internalize particular orders. More broadly, 

wholesalers appear to provide retail brokers with a high degree of consistency with regard to 

execution quality. More specifically, while wholesalers receive order flow from retail brokers 

                                                
399  See infra section VII.B.4 for a full discussion of Table 5 and section VII.B.5 for a discussion of how the 

Commission preliminarily believes that the execution quality of orders routed to wholesalers could be even 

better if most of such orders were not isolated from order-by-order competition. 

400  The E/Q ratio is the ratio of a stock’s effective spread over quoted spread. A lower value indicates smaller 

effective spreads (i.e., trading costs) as a percentage of the quoted spread.  



205 

 

that contains variation in quoted spreads and adverse selection risk, wholesalers can target an 

average level of price improvement across this heterogeneous order flow, resulting in a relatively 

consistent degree of execution quality. 

 

Wholesalers provide market access for retail brokers and generally choose to internalize 

the order flow they receive from these brokers,401 thereby vertically integrating (i.e., bundling) 

their market access and execution services. This vertical integration helps wholesalers achieve a 

competitive advantage in both market access and execution services. Wholesalers are distinct 

from other broker-dealers that provide market access and execution services, in that they focus 

on marketable order flow from individual investors and internalize the large majority of orders 

routed to them. 

Wholesalers determine which orders to execute internally and which to reroute to other 

trading venues, often using a riskless principal transaction. For example, after receiving an order 

from a retail broker, a wholesaler may send a principal marketable order similar to the retail 

broker order to an exchange and, upon execution of the principal order at the exchange, provide 

the same execution terms to the original retail broker order. Alternatively, a wholesaler can 

achieve the same economic result by rerouting the original order in an agency capacity as well. 

In this way, the wholesaler is providing the market access service, but another market center is 

providing the execution service. 

Commission analysis shows that wholesalers internalize over 90% of the executed dollar 

value in NMS stocks from the marketable order flow routed to them by retail brokers, which 

                                                
401  See analysis in infra Table 10. 



206 

 

amounts to more than 80% of share volume.402 Results also show that the marketable NMS stock 

orders wholesalers choose to internalize have less adverse selection risk: orders that wholesalers 

execute in a principal capacity have a price impact of 0.9 bps, compared to a price impact of 4.6 

bps for those executed via other methods.403 These results stem from the incentives wholesalers 

face. As dealers, wholesalers will wish to hold inventory that is not subject to short-term adverse 

price moves. Because orders with greater adverse selection risk will, on average, be followed by 

adverse price moves, wholesalers will on average internalize fewer of these orders.404 

Wholesalers employ algorithms to predict price impact using information to which only 

they have access, such as the identity of the retail broker, and information any market center 

would have, such as order characteristics and stock or market characteristics.405 Indeed, Table 12 

shows significant variation in average price impacts across retail brokers. Because wholesalers 

know which retail brokers sent them the order, they can use that information in combination with 

other information to make internalization and pricing decisions.406 The results in Table 13 

support this conclusion, indicating that wholesalers internalize a higher percentage of individual 

                                                
402  See analysis in infra Table 10.  

403  Id. See also supra note 365 for a definition and discussion of price impact as a measure of adverse selection 

risk. 

404  See infra Table 10 in section VII.B.5.a for analysis indicating that individual investor orders wholesalers 

internalize have lower adverse selection risk and earn higher economic profits, as measured by price 

impacts and realized spreads, than orders wholesalers effectively reroute.  

405 While these provide a few examples of information that could be used by wholesalers, the Commission 

lacks information on what information wholesalers actually use. Further, while the analysis presented here 

shows associations between characteristics, price impacts, and internalization, the analysis cannot 
determine that the expected price impact based on a particular characteristic caused the wholesaler to 

internalize the order.  

406  Having aggregate information on retail order flow could help the wholesaler assess the direction of the 

market, which could also be beneficial for business lines beyond the firm’s wholesaler business. 



207 

 

investor orders from retail brokers whose customers’ orders on average exhibit lower price 

impact.  

 

Retail liquidity programs provide an on-exchange means of segmentation. Indeed, the 

RLPs offered by many registered exchanges are specifically set up to segment the marketable 

order flow of individual investors,407 allowing liquidity suppliers to interact with this order flow 

without the risk that their orders will trade against the marketable orders of other market 

participants that may impose greater adverse selection risk. The pricing increments, both for 

quoting and trading, in RLPs, are usually 0.1 cents,408 although some exchanges have RLP 

programs that allow liquidity suppliers to quote only at the midpoint.409 RLP programs typically 

do not charge an access fee to individual investor orders executed in RLP programs.410 Quotes in 

RLP programs are not displayed.411 Instead, the SIP disseminates a flag indicating the side of the 

market for which an exchange has an RLP quote available at a price better than the NBBO 

available. However, the SIP does not make known the price or the size of the RLP quote, which 

creates opacity in the liquidity available in RLP programs. The goal of these programs is to 

                                                
407  See, e.g., NYSE Rule 7.44 (concerning RLPs). 

408  See, e.g., description of NYSE Retail Liquidity program, available at 

https://www.nyse.com/publicdocs/nyse/markets/liquidity-programs/RLP_Fact_Sheet.pdf. 

409  See, e.g., IEX retail liquidity program, available at https://exchange.iex.io/products/retail-program/.  

410  See, e.g., NYSE Price List, available at 

https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf; NYSE Arca Trading 

Fee,available at https://www.nyse.com/publicdocs/nyse/markets/nyse-

arca/NYSE_Arca_Marketplace_Fees.pdf;  and IEX Exchange Fee Schedule, available at 

https://exchange.iex.io/resources/trading/fee-schedule/. 

411  RLPs operate under an exemption from Rule 612, and are therefore allowed to use sub-penny pricing. As 

part of this exemption, however, they are only eligible for individual investors to execute against and 

cannot display quotes. See supra note 152 for further discussion.  

https://www.nyse.com/publicdocs/nyse/markets/liquidity-programs/RLP_Fact_Sheet.pdf
https://exchange.iex.io/products/retail-program/
https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf
https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf
https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf
https://exchange.iex.io/resources/trading/fee-schedule/


208 

 

compete with wholesalers and to attract marketable order flow of individual investors to trade on 

national securities exchanges.412  

However, it is the Commission’s understanding that the share of individual investor 

trading volume executed through RLPs is small. For example, in 2021, less than 0.2% of 

consolidated volume executed in exchange RLP programs.413 This low market share could be the 

result of several factors. For example, many retail brokers lack direct access to exchanges 

offering RLPs and the means of indirect access may be too costly for RLPs compared to routing 

to wholesalers. Further, wholesalers who compete with RLPs lack the incentives to route the 

individual investor order flow with lower adverse selection risk to the RLPs. If only the 

individual investor order flow with higher adverse selection risk goes to RLPs, the liquidity 

providers in RLPs would widen spreads to reflect the increased adverse selection.414 This in turn, 

makes RLPs less competitive relative to wholesalers. Thus, even retail brokers with exchange 

membership may find wholesalers more attractive than RLPs for cost or execution quality 

reasons. 

                                                
412  See supra note 151 regarding the purpose and operation of RLPs. 

413  See Rosenblatt Securities, How Can the Buy Side Interact With Retail Flow? (Feb. 14, 2022) available at 

https://www.rblt.com/market-reports/how-can-the-buy-side-interact-with-retail-flow. 

414  Unlike wholesalers, liquidity suppliers in RLP programs are not aware of the identity of the retail broker 

that the individual investor originated from. Therefore, they are not able to offer tighter spreads to 

individual investor orders from retail brokers whose orders on average have lower adverse selection risk. 

Instead, liquidity suppliers in RLP need to price their quotes based on the average expected adverse 

selection risk of all orders routed to the RLP. See, e.g., Lawrence R. Glosten & Paul R. Milgrom, Bid, Ask, 

and Transaction Prices in a Specialist Market With Heterogeneously Informed Traders, 14 J. Fin. Econ. 71 

(1985). 

https://www.rblt.com/market-reports/how-can-the-buy-side-interact-with-retail-flow


209 

 

 

Several wholesalers operate SDPs through which they execute institutional orders in 

NMS stocks against their own inventory.415 Because wholesalers also execute individual investor 

orders against their own inventory, the use of SDPs amounts to an indirect interaction between 

institutional and individual investor orders. The trading volume on SDPs is economically 

significant. For example, a study found that in Q1 2022, the SDPs affiliated with the two highest-

volume wholesalers accounted for around 3% of consolidated average daily trading volume in 

NMS stocks.416 Institutional clients often communicate their trading interest to SDPs using 

Immediate or Cancel Orders (“IOCs”) or respond to Indication of Interest (“IOIs”) issued by the 

SDP.  

On an SDP, the single dealer, i.e., the wholesaler, is privy to the identities of the 

counterparties, i.e., institutional investors. One academic paper has found that this information 

revelation may have adverse execution consequences for the institutional investor.417 On the 

other hand, there also may be benefits relative to other trading venues. The trading interest of 

investors who submit IOCs to an SDP for liquidity are only exposed to the single dealer 

operating a platform. In contrast, submission of the same order to an exchange or an ATS may 

alert many other market participants to the underlying trade interest, triggering reactions. As 

such, institutional investors may view SDPs as an opportunity to tap into a pool of liquidity that 

                                                
415  Wholesalers and OTC market makers can execute orders themselves or instead further route the orders to 

other venues. An SDP always acts as the counterparty to any trade that occurs on the SDP. See Where Do 

Stocks Trade?, FINRA (Dec. 3, 2021), available at https://www.finra.org/investors/insights/where-do-

stocks-trade for further discussion.  

416  See Rosenblatt Securities, Rosenblatt’s 2022 US Equity Trading Venue Guide (May 24, 2022), available at 

https://www.rblt.com/market-reports/rosenblatts-2021-us-equity-trading-venue-guide-2. The study also 

found that SDPs accounted for approximately 10% of off-exchange trading volume in Q1 2022 

417  See, e.g., Robert H. Battalio, Brian C. Hatch & Mehmet Saglam, The Cost of Exposing Large Institutional 

Orders to Electronic Liquidity Providers (last revised Nov. 7, 2022) (unpublished manuscript), available at 

https://ssrn.com/abstract=3281324 (retrieved from Elsevier database).  

https://www.finra.org/investors/insights/where-do-stocks-trade
https://www.finra.org/investors/insights/where-do-stocks-trade
https://www.rblt.com/market-reports/rosenblatts-2021-us-equity-trading-venue-guide-2
https://ssrn.com/abstract=3281324


210 

 

reduces their orders’ price impact and avoids triggering significant reactions by other market 

participants.  

 

The wholesaler business model relies in part on segmentation and internalization of 

marketable order flow of individual investors, which is characterized by low adverse selection 

risk. An analysis of the execution quality of market and marketable limit orders handled by 

wholesalers retrieved from Rule 605 reports418 and presented in Table 5419 shows that orders in 

NMS stocks handled by wholesalers are associated with lower price impact420 compared to those 

executed on exchanges, indicating that orders handled by wholesalers on average have lower 

                                                
418  Rule 605 requires market centers to make available, on a monthly basis, standardized information 

concerning execution quality for covered orders in NMS stocks that they received for execution. See 17 

CFR 242.605. Covered orders are defined in 17 CFR 242.600(b)(22) to include orders (including 

immediate-or-cancel orders) received by market centers during regular trading hours at a time when a 

national best bid and national best offer is being disseminated, and, if executed, is executed during regular 

trading hours, and excludes orders for which the customer requests special handling for execution (such as 

not held orders). Rule 605 reports are required to contain a number of execution quality metrics for covered 

orders, including statistics for all NMLOs with limit prices within ten cents of the NBBO at the time of 

order receipt as well as separate statistics for market orders and marketable limit orders. Under the Rule, 

the information is categorized by individual security, one of five order type categories (see 17 CFR 
242.600(b)(14)), and one of four order size categories, which does not include orders for less than 100 

shares or orders greater than or equal to 10,000 shares (see 17 CFR 242.600(b)(11)). As such, Rule 605 

does not require reporting for orders smaller than 100 shares, including odd-lot orders. Rule 605 requires 

market centers to report execution quality information for all covered orders that the market center receives 

for execution, including orders that are executed at another venue (i.e., because they are effectively 

rerouted to another trading center by the market center). 

419  The following filters were applied to the Rule 605 data to remove potential data errors: Observations where 

the total shares in covered orders were less than the sum of the canceled shares, share executed at the 

market center, and share executed away from the market center were deleted; Observations with missing 

order size code, order type code, total covered shares, or total covered orders were deleted; Realized and 

effective spread values are set to missing values if the total shares executed at and away from the market 
center are zero; and Per share dollar realized spreads, per share dollar effective spreads, and per share dollar 

price improvements were winsorized at 20% of the volume weighted average price of the stock for the 

month as calculated from NYSE Daily TAQ data. 

420  See supra note 365 and accompanying text for a definition and discussion of price impact. Table 5 

estimates the average price impact associated with marketable orders routed to wholesalers to be 1.2 bps. 

This means that for a $10 stock the NBBO midpoint would move up (down) by an average of 0.12 cents in 

the five minutes following the execution of marketable buy (sell) order. 



211 

 

adverse selection costs.421 This lower adverse selection cost allows wholesalers to provide these 

orders with better execution quality, manifested in lower effective spreads422 and E/Q ratios 

compared to exchanges. The realized spreads423 observed in Table 5424 adjust effective spreads 

for adverse selection costs (i.e., price impact).425 Thus orders handled by wholesalers have higher 

realized spreads, despite the fact that they may execute at better prices than those received by 

and executed on exchanges, as observed by their lower effective spreads in Table 5.  

                                                
421  Once implemented, the changes to the current arrangements for consolidated market data in the MDI 

Adopting Release, 86 FR at 18621, may impact the numbers in Table 5, including by reducing those for 

realized spread, effective spread, and amount of price improvement. The NBBO will narrow in stocks 

priced greater than $250 because it will be calculated based off a smaller round lot size. This narrower 

NBBO will decrease price improvement statistics in Rule 605 reports, which is measured against the 

NBBO. The effects on effective and realized spreads is more uncertain, because they are measured against 

the NBBO midpoint, which may not change if both the NBB and NBO decrease by the same amount. 

However, if marketable orders are more likely to be submitted when there are imbalances on the opposite 

side of the limit order book (i.e., more marketable buy orders are submitted when there is more size on the 

offer side of the limit order book than the bid side), then the NBBO midpoint may change such that it is 
closer to the quote the marketable order executes against, which may decrease the effective and realized 

spreads in stocks above $250 when the MDI Rules are implemented. It is uncertain how likely this NBBO 

midpoint is to change. It is also uncertain how or to what degree these changes would differ between 

exchange and wholesaler Rule 605 reports. If both changed similarly, then there would not be changes in 

relative differences between their reported spread measures. See supra note 356.  

422  See supra note 366 for a definition and discussion of effective spreads. 

423  See supra note 367 and accompanying text for a definition and discussion of realized spreads as a measure 

of the economic profits earned by liquidity providers. See infra note 426 discussing the limitations of 

realized spreads for estimating the profits earned by market makers.  

424  The exception to this result is market orders executed on exchanges, which have average higher realized 

spreads than wholesaler market orders. However, market orders represent only 0.2% of the overall 

marketable orders executed on exchanges and therefore do not accurately represent exchange realized 
spreads. More specifically, marketable limit orders executed on exchanges in Q1 2022 had a share volume 

of 179.10 billion shares while market orders executed on exchanges had a share volume of 0.39 billion 

shares. See infra Table 5. 

425  The execution quality information required pursuant to Rule 605 combines information about orders 

executed at a market center with information on orders received for execution at a market center but 

executed by another market center; see supra note 407. As such, the execution quality statistics presented in 

Table 5 include orders that are effectively rerouted by wholesalers. Furthermore, note that Rule 605 does 

not specifically require market centers to prepare separate execution quality reports for their SDPs, and as 

such these calculations reflect all covered market and marketable limit orders in NMS stocks received and 

executed by wholesalers, including those on SDPs.  



212 

 

Realized spreads are a proxy for the potential economic profit that liquidity suppliers may 

earn on a trade.426 Therefore, the higher realized spreads earned by wholesalers suggest that the 

isolation of individual investor orders routed to wholesalers results in wholesalers potentially 

earning higher economic profits relative to a venue where market makers compete with each 

other and other market participants to supply liquidity at the individual order level (e.g., an 

exchange). 

Additionally, the results in Table 5 show that approximately 79% of the executed dollar 

volume in marketable orders handled by wholesalers are market orders. The Commission 

believes that these outcomes reflect the heavy utilization of market orders for NMS stocks by 

individual investors whose orders are primarily handled by wholesalers, contrary to the heavy 

utilization of limit orders by other market participants. 

Table 5 also highlights significantly higher fill rates, i.e., the percentage of the shares in 

an order that execute in a trade, for marketable orders sent to wholesalers as compared to those 

                                                
426  See supra note 367 for the definition of the realized spread. Realized spreads do not measure the actual 

trading profits that market makers earn from supplying liquidity. In order to estimate the trading profits that 

market makers earn, we would need to know at what times and prices the market maker executed the off-

setting position for a trade in which it supplied liquidity (e.g., the price at which the market maker later sold 

shares that it bought when it was supplying liquidity). If market makers offset their positions at a price and 

time that is different from the NBBO midpoint at the time lag used to compute the realized spread measure 

(Rule 605 realized spread statistics are measured against the NBBO midpoint 5 minutes after the execution 

takes place), then the realized spread measure is an imprecise proxy for the profits market makers earn 

supplying liquidity. See Conrad and Wahal (2020) (for discussions showing how realized spreads decline 
when measured over time horizons and for further discussions regarding how realized spreads are affected 

when measured over different time horizons). Differences in inventory holding periods of different market 

makers could also create differences in the trading profits that market makers earn that would not be 

captured in the realized spread measure if it is estimated over the same time horizon for all market makers. 

See Lingyan Yang & Ariel Lohr, The Profitability of Liquidity Provision (last revised Feb. 18, 2022) 

(unpublished manuscript), available at https://ssrn.com/abstract=4033802. Additionally, realized spread 

metrics do not take into account any transaction rebates or fees, including PFOF, that a market maker might 

earn or pay, which would also affect the profits they earn when supplying liquidity. Furthermore, realized 

spreads also do not account for other costs that market makers may incur, such as fixed costs for setting up 

their trading infrastructure and costs for connecting to trading venues and receiving market data.  

https://ssrn.com/abstract=4033802


213 

 

sent to exchanges.427 Wholesalers execute the vast majority of orders that they receive against 

their own capital, i.e., they internalize the vast majority of orders they receive.428 Wholesalers 

expose themselves to inventory risk when internalizing order flow, but mitigate this risk by 

internalizing orders that possess low adverse selection risks.  

                                                
427  Marketable orders may not fully execute if there isn’t sufficient liquidity on the exchange to fill the orders 

within their limit price and/or if they contain other instructions that limit their execution, such as if they are 

designated as IOC orders or there are instructions not to route the orders to another exchange. 

428  See analysis in infra Table 10 and corresponding discussion. 



214 

 

Table 5: Comparison of Rule 605 Execution Quality Statistics Between Exchanges and Wholesalers for NMS 

Common Stocks and ETFs in Q1 2022 

 

Combined Marketable 

Orders 
Market Marketable Limit 

 WH EX WH EX WH EX 

Average Price $47.89 $58.14 $56.19 $85.45 $30.66 $58.08 

Share Volume (billion shares) 106.97 179.49 72.20 0.39 34.77 179.10 

Dollar Volume (billion $) $5,122.91 $10,436.02 $4,056.85 $33.53 $1,066.06 $10,402.49 

Fill Rate (%) 69.32% 25.77% 99.79% 58.08% 34.81% 25.77% 

Effective Spread (bps) 1.81 2.06 1.47 3.29 3.11 2.06 

Realized Spread (bps) 0.61 -0.38 0.39 2.40 1.43 -0.39 

Price Impact (bps) 1.20 2.44 1.08 0.90 1.68 2.45 

E/Q ratio 0.48 1.01 0.40 1.65 0.83 1.01 

Pct of Shares Price Improved 83.17% 8.78% 88.99% 15.95% 61.01% 8.75% 

Conditional Amount of Price 

Improvement (bps) 
2.17 1.50 2.33 1.92 1.24 1.50 

This table computes aggregated execution quality statistics for marketable covered orders received by exchanges and 

wholesalers from Rule 605 reports for Q1 2022 for NMS common stocks and ETFs. See supra note 418 for a definition 

of covered orders. Individual wholesaler and exchange Rule 605 reports are aggregated together at the stock-month 

level, into two categories, WH and EX, such that aggregate execution quality data is averaged for, a) wholesalers (WH) 

and, b) exchanges (EX), for each stock during each month.  

The following metrics were calculated: Average Price is the stock’s average execution price from the Rule 605 data 
(Dollar Volume/Share Volume), Share Volume is the total executed shares (in billions) from the Rule 605 data. Dollar 

Volume is the total executed dollar volume (in billions), calculated as the executed share volume from the Rule 605 data 

multiplied by the stock’s monthly VWAP price, as derived from NYSE Daily Trade and Quote data (TAQ). Fill Rate is 

the weighted average of the stock-month total executed share volume/total covered shares from the Rule 605 data. 

Effective Spread is the weighted average of the stock-month percentage effective half spread in basis points (bps). 

Realized Spread is the weighted average of the stock-month percentage realized half spread in basis points (bps). Price 

Impact is the weighted average of the stock-month percentage price impact in basis points (bps). E/Q ratio is the 

weighted average of the stock-month ratio of the effective spread/quoted spread. Pct of Shares Price Improved is the 

weighted average of the stock-month ratio of shares executed with price improvement/total executed share volume. 

Conditional Amount of Price Improvement is the weighted average of the stock-month of the amount of percentage 

price improvement in basis points (bps), conditional on the executed share receiving price improvement. 

Aggregated effective and realized percentage spreads are measured in half spreads in order to show the average cost of 
an individual investor order and are calculated by dividing the aggregated Rule 605 reported per share dollar amount by 

twice the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data 

(TAQ), for trades executed during regular market hours during the month. Percentage price impact is calculated as the 

aggregated Rule 605 reported per share dollar effective spreads minus per share dollar realized spreads divided by twice 

the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data 

(TAQ). Percentage amount of price improvement is calculated as the aggregated Rule 605 reported per share dollar 

amount of price improvement divided by the stock’s monthly volume weighed average price (VWAP), as derived from 

NYSE Daily Trade and Quote data (TAQ). Percentage spreads and amount of price improvement percentages are 

reported in basis points (bps). The Combined Market and Marketable Limit order type category is constructed for each 

security-month-order size category by combining the market and marketable limit order categories and computing the 

total and share weighted average metrics for the order size category for each security-month.  



215 

 

The sample includes NMS common stocks and ETFs that are present in the CRSP 1925 US Stock Database, Ctr. Rsch. 

Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. 

Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not have to be in 

the CRSP 1925 US Indices Database to be included in the analysis. NMS Common stocks and ETFs are identified, 

respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’. For each stock-month-order-type (such 
that aggregate execution quality data is averaged for, a) wholesalers and, b) exchanges, for each stock during each 

month) the per dollar share weighted measures from Rule 605 reports are aggregated together by share-weighting 

across different trading venues and order-size categories within the stock-month-order-type and venue type (i.e. trading 

venue Rule 605 reports for exchanges and wholesalers are aggregated into different categories). Percent values are then 

calculated for each stock month by dividing by the stock’s monthly volume weighed average price (VWAP). These 

percentage stock-month values are averaged together into order-type categories (market orders, marketable limit 

orders, and the combined market and marketable limit order type category, for both wholesalers and exchanges) based 

on weighting by the total dollar trading volume for the wholesaler or exchange category in that stock-month-order 

type, where dollar trading volume is estimated by multiplying the Rule 605 report total executed share volume, i.e., the 

share volume executed at market center + share volume executed away from the market center, for the stock-month-

order type by the stock’s monthly VWAP. See supra note 419 for a discussion of filters that were applied to the Rule 

605 data in this analysis.  

Because segmented orders valued at $200,000 and greater would be excepted from 

Proposed Rule 615,429 we limit our analysis to Rule 605 order size categories where the average 

dollar value of orders received by wholesalers was under $200,000.430 Table 6 summarizes Rule 

605 data comparing the execution quality of marketable orders (i.e., the combined market and 

marketable limit order category in Table 5) under $200,000 routed to wholesalers and exchanges 

for different security types.431 In Table 6, the average realized spreads for marketable orders 

routed to exchanges are negative for all security types,432 while orders routed to wholesalers have 

                                                
429  See supra section IV.B.5 discussing exceptions to the Proposed Rule  

430  We estimated the average dollar value of the orders received by wholesalers based on their Rule 605 

reports by multiplying the average order size for a stock-month-order-size-category (estimated as the 

number of total covered shares divided by the number of total covered orders) by the stock’s average 

monthly VWAP price estimated from NYSE TAQ data.  

431  Both the wholesaler and exchange average execution metrics in Table 6 are calculated based on weighting 

by the total wholesaler dollar trading volume in that stock-month. This weighting method calculates 

averages across stocks similarly for exchanges and wholesalers when aggregating their Rule 605 reports, 

which helps ensure the averages across stocks are comparable between exchanges and wholesalers. 

432  A negative average realized spread on exchanges does not necessarily mean that market makers on 

exchanges are not earning trading profits for supplying liquidity on exchanges. The realized spread 

observed on exchanges is a mix of liquidity supplied by market makers and limit orders submitted by other 

traders who may be interested in trading but not earning a spread (e.g., limit or midpoint orders of 

individual or institutional investors that potentially don’t want to pay the spread to trade). Additionally, as 

discussed in supra note 426, the realized spread is a proxy and does not measure the actual trading profits 

that market makers earn from supplying liquidity. It does not include exchange rebates liquidity suppliers 



216 

 

positive realized spreads in all securities, with larger realized spreads in Non-S&P 500 stocks. 

The positive realized spreads for marketable orders routed to wholesalers seem to indicate that 

the amount of price improvement these orders receive in the form of lower effective spreads does 

not fully offset the lower adverse selection costs they impose on liquidity suppliers (as measured 

by lower price impacts) compared to negative realized spreads for orders routed to exchanges.433 

                                                
may earn and also makes assumptions about the time and price at which the liquidity suppliers exit the 

position. After accounting for exchange rebates, liquidity suppliers on exchanges could potentially earn 

average positive trading profits if they exit their positions at a different time or price than the estimated 

NBBO midpoint at the time horizon used to estimate the realized spread (5 minutes for realized spreads 

reported in Rule 605). See Conrad and Wahal (2020) for discussions on how realized spreads vary when 

calculated over different time horizons.  

433  Other studies have also used realized spreads to examine competition between liquidity suppliers. See, e.g., 

Roger Huang & Hans Stoll, Dealer versus auction markets: A paired comparison of execution costs on 

NASDAQ and the NYSE, 41 J. Fin. Econ. 313 (1996) (finding that in 1991 realized spreads for a sample of 

NASDAQ stocks were higher than realized spreads for a matched sample of NYSE stocks and concluding 

that important explanations for the higher spreads observed on NASDAQ were the internalization and 

preferencing of order flow and the presence of alternative interdealer trading systems, factors that limited 

dealers’ incentives to narrow spreads); Jonathan Brogaard & Corey Garriott, High-Frequency Trading 

Competition, 54 J. Fin. & Quantitative Analysis 1469 (2019) (looking at the effects of the entry of new 

high-frequency traders that compete to supply liquidity on the Canadian Alpha exchange and finding that 

realized spreads decreased for the marketable orders of non-high-frequency traders after new high-

frequency traders entered the market; the study observed that the reduction in realized spreads was not 
attributable to changes in the price impact of the orders of non-high-frequency traders and that the 

reduction in realized spreads was attributable to increased competition among liquidity suppliers); and 

Hank Bessembinder & Herbert Kaufman, A cross-exchange comparison of execution costs and information 

flow for NYSE-listed stocks, 46 J. Fin. Econ. 293 (1997) (finding in 1994 that effective bid-ask spreads for 

trades in NYSE issues completed on the NYSE are slightly smaller than for trades completed with the 

NASD dealer market and the regional stock exchanges but the realized bid-ask spreads for trades on the 

NYSE are lower by a factor of two to three; the authors conclude that this differential is attributable to the 

successful 'cream skimming' of uninformed trades by market makers off of the NYSE exchange; the 

authors also raise concerns as to whether the trades being diverted from the NYSE might have received 

better execution if they were not diverted and whether existing rules governing order flow effectively 

fostered competition). 

 



217 

 

Table 6 also shows realized spreads adjusted to reflect share-level PFOF payments paid 

by wholesalers434 and rebates paid by exchanges.435 After these respective costs are netted out, 

although wholesaler realized spreads are reduced and exchange realized spreads increase (i.e., 

are less negative), wholesaler realized spreads continue to exceed exchange realized spreads. 

Adjusting for rebates on the one hand and PFOF on the other allows us to estimate a marginal 

profit to a liquidity supplier in each venue (note that a rebate substitutes one-for-one with a 

spread, as does PFOF, and in an idealized perfect-competition setting both would be zero). 

Acknowledging that there may be differences not captured by these measures, this calculation 

suggests a higher marginal profit for orders off-exchange versus on-exchange, and suggests 

greater on-exchange competition.436 While an accounting measure of profit would need to take, 

                                                
434  Wholesaler realized spreads are adjusted to account for the PFOF they pay to retail brokers. Because we are 

not able to identify the broker-dealer from which the orders originated in Rule 605 reports, we estimate 

PFOF rates for the Rule 605 data sample by multiplying the estimated PFOF rates retail brokers receive in 

Table 2 by 74% in order to adjust for an estimated 26% of the marketable order flow wholesalers receive 

coming from retail brokers that do not accept PFOF, as estimated by the percentage of share volume 

received from non-PFOF brokers in infra Table 14. The estimated PFOF rates are 12 mils for market orders 

in S&P 500 stocks, 10 mils for market orders in ETFs and non-S&P 500 stocks, 17 mils for marketable 

limit order in S&P 500 stocks, and 9 mils for marketable limit orders in ETFs and non-S&P 500 stocks. For 

the Rule 605 data sample, the wholesalers’ PFOF adjusted realized spread is computed by subtracting the 

relevant PFOF rate from a stock’s average dollar realized spread for orders routed to wholesalers and then 

dividing by twice the stock’s average monthly VWAP price estimated from NYSE TAQ data.  

435  Estimates of exchange rebates that liquidity suppliers earn on maker-taker venues and the fees they pay on 

inverted and flat fee venues are assumed as follows: exchange rebates to liquidity suppliers on maker-taker 

venues are 27 mils; exchange fees for supplying liquidity on inverted venues are 15 mils; exchange fees for 

supplying liquidity on flat fee venues are 7 mils; and there is no fee on exchanges that do not charge fees 

and rebates. Exchange rebates are assumed to be 27 mils based on the average rate exchanges pay retail 

brokers for their non-marketable limit orders in Table 2. Fee rates for inverted and flat fee venues (which 

charge fees to both liquidity suppliers and demanders and do not pay rebates) were estimated based on 

exchange fee and rebate tables and were adjusted by 3 mils to account for volume-based tiering (for 

inverted venues) or differences in fees supplying liquidity using displayed vs. non-displayed orders (for flat 

fee venues). For both the Rule 605 and CAT data samples (see infra Table 7), a stock’s rebate adjusted 
exchange realized spread is calculated by adding/subtracting the exchange rebate/fee to/from the average 

dollar realized spread and then dividing by twice the stock’s average monthly VWAP price estimated from 

NYSE TAQ data.  

436  One caveat to the difference in transaction costs on and off-exchange is that, on-exchange execution, to the 

extent it is driven by institutional order flow, may be accompanied by commissions. While this should not 

affect the interpretation of realized spreads as marginal profit to liquidity provision, it does reflect the 

interpretation as either the transaction cost of the customer or marginal profit of the liquidity supplier 

handling customer order flow. 



218 

 

say, fixed costs into account, fixed costs alone would not explain the difference as liquidity 

suppliers on both types of venues may have similar fixed costs.  



219 

 

Table 6: Rule 605 Wholesaler (WH) and Exchange (EX) Execution Quality Comparison for Marketable 

Orders under $200,000 for Q1 2022 by Security Type 

 All NMS 

Stocks 
S&P 500 Non-S&P 500 ETF 

Average Price $33.99 $97.03 $13.52 $51.19 

WH Share Volume (billion shares) 96.51 15.00 62.32 19.18 

WH Dollar Volume (billion $) $3,280.03 $1,455.40 $842.66 $981.98 

EX Share Volume (billion shares) 172.08 39.89 86.67 45.52 

EX Dollar Volume (billion $) $9,025.52 $3,448.64 $1,899.61 $3,677.27 

WH Fill Rate (%) 69.06% 73.17% 66.65% 65.03% 

EX Fill Rate (%) 27.31% 32.53% 29.56% 17.63% 

WH Effective Spread (bps) 2.05 0.72 5.70 0.89 

EX Effective Spread (bps) 3.11 1.45 7.86 1.49 

WH Realized Spread (bps) 0.72 0.30 1.55 0.64 

EX Realized Spread (bps) -0.67 -0.30 -1.97 -0.12 

WH Realized Spread Adj PFOF (bps) 0.43 0.17 0.86 0.45 

EX Realized Spread Adj Rebate (bps) -0.001 -0.05 -0.24 0.28 

WH Price Impact (bps) 1.33 0.42 4.15 0.25 

EX Price Impact (bps) 3.78 1.74 9.83 1.61 

WH E/Q Ratio 0.42 0.35 0.49 0.45 

EX E/Q Ratio 1.00 0.98 1.00 1.01 

WH % Pct of Shares Price Improved 84.7% 86.7% 82.5% 83.4% 

EX % Pct of Shares Price Improved 8.8% 10.9% 9.5% 5.2% 

WH Conditional Amount of Price 

Improvement (bps) 
2.62 1.49 6.27 1.17 

EX Conditional Amount of Price 
Improvement (bps) 

2.36 1.04 5.88 1.28 

This table compares aggregated execution quality statistics broken out for different security types for marketable 

covered orders with average order size under $200,000 received by exchanges and wholesalers as reported from 

Rule 605 reports for Q1 2022 for NMS common stocks and ETFs. See supra note 418 for a definition of covered 

orders. Individual wholesaler and exchange Rule 605 reports are aggregated together at the stock-month level into 

two categories, EX and WH. EX shows aggregated statistics from Rule 605 reports from exchanges and WH 

shows aggregated statistics from Rule 605 reports from wholesalers. Marketable orders are constructed separately 

for wholesalers and exchanges by combining the Market and Marketable Limit order type categories in Rule 605 

reports for each security-month-order size category and computing the total and share weighted average metrics 

from the combined order types for the order size category for each security-month.  

See supra Table 5 for the descriptions of the reported metrics: Average Price, Share Volume, Dollar Volume, Fill 

Rate, Effective spread, Realized spread, Price Impact, E/Q Ratio, Pct Shares Price Improved, and Conditional 
Amount of Price Improvement. WH Realized Spread Adj PFOF is the weighted average of the stock-month 

percentage realized half spread in basis points (bps) from wholesaler 605 reports after adjusting for the estimated 

PFOF paid by the wholesaler using the methodology described in supra note 434. EX Realized Spread Adj 

Rebate is the weighted average of the stock-month percentage realized half spread in basis points (bps) from 

exchange 605 reports after adjusting for the estimated rebates (access fees) exchanges pay (charge) to liquidity 

suppliers using the methodology described in supra note 435. 

Percentage spreads are measured in half spreads in order to show the average cost of an individual investor order 

and are calculated by dividing the Rule 605 report per share dollar amount by twice the stock’s monthly VWAP, 

as derived from NYSE Daily Trade and Quote data (TAQ), for trades executed during regular market hours 

during the month. Percentage spreads are reported in basis points (bps).  



220 

 

The sample includes NMS common stocks and ETFs that are present in the CRSP 1925 US Stock Database, Ctr. 

Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, 

U. Chi. Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not 

have to be in the CRSP 1925 US Indices Database to be included in the analysis. NMS Common stocks and ETFs 

are identified, respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF. The exchange and 

wholesaler metrics in the table are each reported for the combined marketable order type, which was constructed 
for this analysis separately for exchange and wholesalers by combining the Market and Marketable Limit order 

type categories in Rule 605 reports at the stock-month-order-size level and computing the total and share 

weighted average metrics from the combined order types. For each stock-month, share weighted metrics (for both 

exchange and wholesalers) are then calculated by share-weighting across different order-size categories based on 

the number of shares executed (at the market center + away) in wholesalers’ Rule 605 reports in that order-size 

category. Order size categories with wholesaler average order dollar values greater than or equal to $200,000 

were excluded. The average order dollar values were determined for each order-size category stock-month by 

dividing the wholesaler total number of covered shares in the order size category by the wholesaler total number 

of covered orders and then multiplying by the stock-month’s average VWAP, as derived from NYSE Daily Trade 

and Quote data (TAQ). Stock-month values are averaged together (for both wholesalers and exchanges) based on 

weighting by the total wholesaler dollar trading volume in that stock-month for the combined marketable order 

type (wholesaler dollar trading volume is estimated by multiplying the Rule 605 report wholesaler total executed 
share volume, i.e., the share volume executed at market center + share volume executed away from the market 

center, for the stock-month-order type by the stock’s monthly VWAP). This weighting method calculates 

averages across stocks similarly for exchanges and wholesalers when aggregating their Rule 605 reports, which 

helps ensure the averages across stocks are comparable between exchanges and wholesalers. See supra note 419 

for a discussion of filters that were applied to the Rule 605 data in this analysis. 

Because Rule 605 requires market centers to report execution quality statistics only for 

covered orders that fall within specific order size and type categories,437 a number of order types 

and sizes that may be particularly relevant for individual investors are excluded from the above 

analyses, including orders for less than 100 shares.438 Additionally Rule 605 data does not allow 

us to distinguish between orders that wholesalers execute on a principal basis from those they 

execute on riskless principal basis, since they are both reported as being executed at the market 

center. Furthermore, it is not possible in Rule 605 data to distinguish between orders that a 

wholesaler received from individual investors from those it received from other types of market 

                                                
437  See supra note 407 for a definition of covered orders and a discussion of the order type and size categories 

included in Rule 605 reporting requirements. 

438  There is evidence that individual investors tend to use smaller trading sizes. See, e.g., Robert P. Bartlett, 

Justin McCrary & Maureen O’Hara, The Market Inside the Market: Odd-Lot Quotes (last revised Feb. 11, 

2022) (unpublished manuscript), available at https://ssrn.com/abstract=4027099 (retrieved from 

Elsevier database); Matthew Healey, An In-Depth View Into Odd Lots, Cboe (Oct. 2021), available at 

https://www.cboe.com/insights/posts/an-in-depth-view-into-odd-lots/. 

https://ssrn.com/abstract=4027099
https://www.cboe.com/insights/posts/an-in-depth-view-into-odd-lots/221 

 

participants. For example, wholesaler Rule 605 reports may include both individual investor 

orders that they receive, as well as institutional orders they receive on their SDPs. Lastly, 

effective and realized spread measures as required to be reported in Rule 605 reports are 

calculated using a five-minute time horizon, which some academic literature argues has become 

inappropriate for a high-frequency environment.439 Therefore, to supplement the analyses using 

Rule 605 data and test for the robustness of the results440 that it generated, CAT data441 was 

analyzed to look at the execution quality of marketable orders of individual investors in NMS 

Common Stocks and ETFs that were less than $200,000 in value and that executed and were 

handled by wholesalers during Q1 2022 (“CAT retail analysis”).442 This was compared to a 

                                                
439  See, e.g., Maureen O’Hara, High Frequency Market Microstructure, 116 J. Fin. Econ. 257 (2015) (“O’Hara 

2015”); Maureen O’Hara, Gideon Saar & Zhuo Zhong, Relative Tick Size and the Trading Environment, 9 

Rev. of Asset Pricing Stud. 47 (2019) (“O’Hara et al.”); Jennifer S. Conrad & Sunil Wahal, The Term 

Structure of Liquidity Provision, 136 J. Fin. Econ. 239 (2020) (“Conrad and Wahal”). Conrad and Wahal 

suggest that a one-minute horizon may be appropriate for small stocks, and a 15-second horizon may be 

appropriate for large stocks. The following analyses using CAT data will use a one-minute horizon for 

calculating the realized spread; see supra note 50. 

440  Rule 605 data is publicly available and the consistency of the results generated by analysis of these data 

supports the veracity of the results generated by CAT data, despite the fact that CAT data is not publicly 

available. 

441 This analysis used CAT data to examine the execution quality of marketable orders in NMS Common 

stocks and ETFs that belonged to accounts with a CAT account type of “Individual Customer” and that 

originated from a broker-dealer MPID that originated orders from 10,000 or more unique “Individual 

Customer” accounts during Jan. 2022. The number of unique “Individual Customer” accounts associated 

with each MPID was calculated as the number for unique customer account identifiers with an account 

customer type of “Individual Customer” that originated at least one order during the month of Jan. 2022. 

The Commission found that 58 broker-dealer MPIDs associated with 54 different broker-dealers originated 

orders from 10,000 or more unique Individual Customer accounts in Jan. 2022. As discussed in supra note 

194, the CAT account type “Individual Customer” may not be limited to individual investors because it 

includes natural persons as well as corporate entities that do not meet the definitions for other account 

types. The Commission restricted that analysis to MPIDs that originated orders from 10,000 or more 
“Individual Customer” accounts in order to ensure that these MPIDs are likely to be associated with retail 

brokers to help ensure that the sample is more likely to contain marketable orders originating from 

individual investors. NMS Common stocks and ETFs are identified, respectively, as securities in TAQ with 

a Security Type Code of “A” and “ETF.” 

442  Fractional share orders with share quantity less than one share were excluded from the analysis. The 

analysis included market and marketable limit orders that originated from one of the 58 retail broker 

MPIDs and were received by a market center that was associated with one of the six wholesalers CRD 

numbers (FINRA’s Central Registration Depository number) during some point in the order’s lifecycle. 

Orders that were received by the wholesaler or executed outside of normal market hours were excluded. 



222 

 

sample of CAT data examining the execution quality of executed market and marketable limit 

orders in NMS Common Stocks and ETFs received by exchanges that were less than $200,000 in 

value over the same time period (“CAT exchange analysis”).443 

                                                
Orders were also excluded if they had certain special handling codes so that execution quality statistics 

would not be skewed by orders being limited in handling by special instructions (e.g., pegged orders, stop 

orders, post only orders, etc.) Orders identified in CAT as Market and Limit orders with no special 

handling codes or one of the following special handling codes were included in the analysis: NH (not held), 

CASH (cash), DISQ (display quantity), RLO (retail liquidity order), and DNR (do not reduce). These 

special handling codes were identified based on their common use by retail brokers and descriptions of 

their special handling codes. The marketability of a limit order was determined based on the consolidated 

market data feed NBBO at the time a wholesaler first receives the order. Limit orders that were not 

marketable were excluded. The dollar value of an order was determined by multiplying the order’s number 

of shares by either its limit price, in the case of a limit order, or by the far side quote (i.e., NBO for a 

market buy order and NBB for a market sell) of the consolidated market data feed NBBO at the time the 
order was first received by a wholesaler, in the case of a market order. Orders with dollar values greater 

than or equal to $200,000 were excluded from the analysis. The analysis includes NMS Common Stocks 

and ETFs (identified by security type codes of ‘A’ and ‘ETF’ in NYSE TAQ data) that are also present in 

CRSP data. Price improvement, effective spreads, realized spreads, quoted spreads, and price impacts were 

winsorized if they were greater than 20% of a stock’s VWAP during a stock-week. See Table 7 for a 

detailed description of the analysis. 

443  The Commission analysis used CAT data to examine the execution quality of market and marketable limit 

orders in NMS Common Stocks and ETFs that were under $200,000 in value that were received and 

executed by exchanges during normal market hours in Q1 2022. The analysis employed filters to clean the 

data and account for potential data errors. The analysis is limited to orders identified in CAT as market and 

limit orders accepted by exchanges. Orders were excluded from the analysis if they had certain special 
handling codes, such as post or add-liquidity only orders, midpoint orders, orders that can only execute in 

opening and closing auctions, orders with a minimum execution quantity, pegged orders, or stop order or 

stop-loss orders. Orders were also required to execute in normal trades during normal trading hours to be 

included in the analysis. Normal trades are identified in CAT data by sale conditions “blank, @, E, F, I, S, 

Y” which correspond to regular trades, intermarket sweep orders, odd lot trades, split trades, and yellow 

flag regular trades. For orders submitted to exchanges, the NBBO the exchange records seeing at the time 

of order receipt is used to measure the NBBO and NBBO midpoint for calculating statistics that are based 

on the time of order receipt (e.g., effective spreads, price improvement, quoted spreads, etc.). The 

marketability of exchange orders was determined based on the NBBO observed by the exchange at the time 

of order receipt. The dollar value for a market order was calculated as the price of the far side NBBO quote 

(NBO for a market buy order and NBB for a market sell) times the shares in the order. The dollar value for 
a limit order was calculated as the price of the limit order times the number of shares in the order. Orders 

with dollar values greater than or equal to $200,000 were excluded from the analysis. The consolidated 

market data feed NBBO was used to calculate statistics that use the NBBO or NBBO one minute after 

execution (e.g., realized spreads, price impacts, etc). The analysis includes NMS Common Stocks and 

ETFs (identified by security type codes of ‘A’ and ‘ETF’ in NYSE TAQ data) that are also present in 

CRSP data. Price improvement, effective spreads, realized spreads, quoted spreads, and price impacts were 

winsorized if they were greater than 20% of a stock’s VWAP during a stock-week. See Table 7 for a 

detailed description of the analysis.  



223 

 

Table 7, which reports results from CAT data, contains some statistics that are not 

available in Rule 605 reports, including statistics on midpoint executions and sub-penny 

trades.444 In NMS common stock and ETF orders, wholesalers execute approximately 44% of 

shares at prices at or better than the NBBO midpoint. However, wholesalers also offer less than 

0.1 cents price improvement to approximately 18.6% of shares that they execute. Wholesalers 

execute more than 65% of shares at sub-penny prices, with over 40% of shares being executed at 

prices with four decimal points (i.e., the fourth decimal place is not equal to zero).  

Results from this analysis are highly consistent with results from the analysis of Rule 605 

data from Table 6. Specifically, wholesalers display lower price impacts and E/Q ratios, 

indicating that orders internalized by wholesalers receive better execution quality than orders 

executed on exchanges. Despite this enhanced execution quality, realized spreads of wholesalers 

exceed those produced by exchanges.445 This finding remains even after netting out PFOF 

payments made by wholesalers446 and rebates made by exchanges.447 

  

                                                
444  Certain items in Table 7 may also be affected by the MDI rules once they are implemented. See supra notes 

356 and 421. 

445  The relative differences between exchanges and wholesalers in price impacts and realized spreads are even 

more pronounced with the CAT data, which (unlike 605 data) include odd lots, exclude orders greater than 

$200,000, and measure realized spreads from 1 minute rather than 5 minutes after execution. 

446  For CAT data, we estimate the PFOF each retail broker receives based on data from their Q1 Rule 606 

reports. For each month we separately estimate the average per share PFOF rate they receive from 

wholesalers based on the order type (market and marketable limit orders) and security type (S&P500 and 

non-S&P500 stocks), which we then combine with the same order and stock type in the CAT data. If a 

retail broker does not produce a Rule 606 report, then we use the PFOF rates from its clearing broker’s 

Rule 606 report, if it is available (some retail brokers’ websites disclosed that they share in payments their 

clearing broker receives for their order flow).  A PFOF rate of 20 cents per 100 shares was used for the 

introducing broker-dealers and clearing broker that reported handled orders on a not held basis and did not 

disclose PFOF information in their Rule 606 report but disclosed on their website that they received PFOF 
for their order flow. 20 cents per 100 shares was the PFOF rate that the clearing broker that handles orders 

on a not held basis disclosed on their website that they received. 

447  See supra note 435 for discussion of how exchange rebates are calculated. 



224 

 

  

Table 7: Wholesaler CAT Analysis of Exchange Individual Investor Order Execution Quality for 

Marketable Orders in NMS Common Stocks and ETFs by Type of Stock 

Panel A: Wholesaler and Exchange Execution Quality 

Variable All SP500 NonSP500 ETF 

Average Price $29.87 $110.31 $10.52 $53.14 

WH Principal Execution Rate 90.44% 93.07% 87.66% 88.12% 

WH Share Volume (billion shares) 87.11 11.63 63.17 12.31 

EX Share Volume (billion shares) 281.90 66.98 140.82 74.10 

WH Dollar Volume (billion $) $2,601.44 $1,282.62 $664.41 $654.41 

EX Dollar Volume (billion $) $16,194.84 $6,479.89 $3,246.09 $6,468.85 

WH Effective Spread (bps) 2.11 0.67 6.23 0.76 

EX Effective Spread (bps) 3.18 1.52 8.11 1.42 

WH Realized Spread (bps) 0.85 0.42 2.00 0.51 

EX Realized Spread (bps) -1.22 -0.28 -3.90 -0.34 

WH Realized Spread Adj PFOF (bps) 0.49 0.29 0.99 0.36 

EX Realized Spread Adj Rebate (bps) -0.40 -0.06 -1.54 0.08 

WH Price Impact (bps) 1.26 0.25 4.22 0.25 

EX Price Impact (bps) 4.40 1.80 12.00 1.75 

WH E/Q Ratio 0.39 0.32 0.50 0.41 

EX E/Q Ratio 1.04 1.01 0.98 1.17 

Panel B: Wholesaler Price Improvement 

Variable All SP500 NonSP500 ETF 

WH Pct Executed with Price Improvement 89.95% 93.33% 85.43% 87.93% 

WH Conditional Amount Price 

Improvement (bps) 
2.54 1.47 6.16 0.99 

WH Pct Shares Executed at Midpoint or 

Better 
44.57% 47.37% 39.76% 43.97% 

WH Pct Shares Executed at Midpoint 31.69% 32.47% 28.46% 33.44% 

WH Pct Shares Executed at NBBO 8.38% 5.86% 10.97% 10.69% 



225 

 

WH Pct Shares Executed Outside NBBO 1.67% 0.81% 3.61% 1.38% 

WH Pct Shares Executed with <0.1 cent 

Price Improvement 
18.64% 16.62% 20.58% 20.64% 

WH Pct of Shares Executed as Subpenny 

Prices 
66.98% 65.10% 64.16% 73.55% 

WH Pct of Shares Executed at Subpenny 

Prices without Midpoint Trades 
47.60% 46.82% 47.03% 49.68% 

WH Pct of Shares Executed at Subpenny 

Prices with 4 Decimals 
41.36% 40.80% 41.76% 42.06% 



226 

 

This table uses CAT data to compare aggregated execution quality statistics for Q1 2022 broken out for different 

security types for executed marketable orders with order size under $200,000 in NMS Common Stocks and ETFs 

received by wholesalers from individual investors to similar orders received by exchanges. Aggregated statistics 

in the table labeled WH are based on analysis of CAT data of executed marketable orders in NMS Common 

Stocks and ETFs from individual investors for under $200,000 in value belonging to one of 58 retail broker 

MPIDs that were handled by one of 6 wholesalers during normal market hours in Q1 2022 (see supra note 442 for 
additional discussions on the CAT data used in the CAT retail analysis). Aggregated statistics in the table labeled 

EX are based on a corresponding analysis of CAT data of executed marketable orders in NMS Common Stocks 

and ETFs receive by exchanges that were under $200,000 in value and received and executed during normal 

market hours in Q1 2022 (see supra note 443 for additional discussions on the CAT data used in CAT exchange 

analysis). 

The following metrics are calculated for all stocks and for each of the stock-types. EX indicates aggregated 

statistics for executed marketable orders routed to exchanges and WH indicates aggregated statistics for executed 

marketable orders from individual investors that were routed to wholesalers. Average Price is the average 

execution price. WH Principal Execution Rate is the percentage of dollar volume of individual investor trades 

that a wholesaler executed in a principal capacity. Share Volume is the total executed share volume. Dollar 

Volume is the total executed dollar volume. Effective Spread is the weighted average of the percentage effective 

half spread in basis points (bps) (measured as average (execution price – NBBO midpoint at time of order receipt) 
* average transaction price). Realized Spread is the weighted average of the percentage one minute realized 

spread in bps (measured as average (execution price – NBBO midpoint one minute after execution) * average 

transaction price). WH Realized Spread Adj PFOF is the estimated realized spread in bps earned by the 

wholesaler after adjusting the realized spread for the estimated PFOF they pay to retail brokers (see supra note 

446 for further details on adjusting wholesaler realized spreads for PFOF in CAT data). EX Realized Spread Adj 

Rebate is the estimated realized spread in bps earned by exchange liquidity suppliers after adjusting the realized 

spread for the estimated exchange rebates they receive or access fees they pay for supplying liquidity (see supra 

note 435 for further details on adjusting realized spreads for exchange fees and rebates). Price Impact is the 

weighted average of the percentage one-minute price impact spread in bps (measured as average (NBBO 

midpoint one minute after execution - NBBO midpoint at time of order receipt) / average transaction price). E/Q 

Ratio is the weighted average of the ratio of the effective dollar spread divided by its quoted spread at the time of 
order receipt. WH Pct Executed with Price Improvement is the weighted average of the percentage of share 

volume that is routed to wholesalers and executed at a price better than the NBBO. WH Conditional Amount 

Price Improvement is the weighted average amount of percentage price improvement given by wholesalers 

conditional on the order receiving price improvement in bps (measured for a marketable buy order as average 

(NBO at time of order receipt – execution price) and measured for a marketable sell order as average (execution 

price - NBB at time of order receipt) and then dividing the difference by the average transaction price). WH Pct 

Share Executed at Midpoint or Better is the weighted average of the percentage of shares that are routed to a 

wholesaler and executed at prices equal to or better than the NBBO midpoint at the time of order receipt. WH Pct 

Share Executed at Midpoint is the weighted average of the percentage of shares that are routed to a wholesaler 

and executed at a price equal to the NBBO midpoint at the time of order receipt. WH Pct Shares Executed at 

NBBO is the weighted average of the percentage of share volume routed to a wholesaler and executed at the 
NBBO at the time of order receipt (executed at the NBB for marketable sell orders and the NBO for marketable 

buy orders). WH Pct Shares Executed Outside NBBO is the weighted average of the percentage of share volume 

routed to wholesalers and executed at prices outside the NBBO at the time of order receipt (executed at a price 

less than the NBB for marketable sell orders and a price greater than the NBO for marketable buy orders). WH 

Pct Shares Executed with <0.1 cent Price Improvement is the weighted average of the percentage of shares that 

are executed with an amount of price improvement less than 0.1 cents measured against the NBBO at the time of 

order receipt. WH Pct Shares Executed Subpenny Prices is the weighted average of the percentage of shares that 

execute at a subpenny price (a dollar execution price with a non-zero value in the third or fourth decimal place). 

WH Pct Shares Executed at Subpenny without Midpoint Trades is the weighted average of the percentage of 

shares that execute at a subpenny price (a dollar execution price with a non-zero value in the third or fourth 

decimal place), excluding executions with subpenny prices that occur at the NBBO midpoint. WH Pct Shares 

Executed at Subpenny Prices with 4 Decimals is the weighted average of the percentage of shares that execute at 
a subpenny price where there is a dollar execution price with a non-zero value in the fourth decimal place. 

Average transaction prices used in calculating the metrics are calculated as the total dollar trading volume divided 

by the total share trading volume in the category and time period. 



227 

 

For the wholesaler (WH) CAT metrics used in the sample, the analysis includes marketable orders for under 

$200,000 in value that originate from a customer with a CAT account type of “individual” at one of the 58 retail 

broker MPIDs and are routed to a wholesaler (see supra note 441 for more info on CAT account types and retail 

broker identification methodology and supra note 442 for more details on how the CAT retail analysis sample 

was constructed). Fractional share orders with share quantity less than one share were excluded from the analysis. 

Orders were also excluded if they had certain special handling codes. The marketability of a limit order is 

determined based on the consolidated market data feed NBBO at the time a wholesaler first receives the order.  

For the exchange (EX) CAT metrics, executed market and marketable limit orders received by exchanges during 

normal market hours over the same period were used to calculate the exchange execution quality statics (see 

supra note 443 for more details on how the CAT exchange sample was constructed). Exchange orders were 

filtered if they had certain special handling codes. The marketability of exchange orders was determined based on 

the NBBO observed by the exchange at the time of order receipt.  

The dollar value of an order was determined by multiplying the order’s number of shares by either its limit price, 

in the case of a limit order, or by the far-side quote of the NBBO at the time of order receipt, in the case of a 

market order. The analysis includes NMS Common Stocks and ETFs (identified by security type codes of ‘A’ and 

‘ETF’ in NYSE TAQ data) that are also present in CRSP data from CRSP 1925 US Stock Database, Ctr. Rsch. 

Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. 

Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not have to 
be in the CRSP 1925 US Indices Database to be included in the analysis. Time of order receipt is defined as the 

time the wholesaler or exchange first receives the order. Wholesaler metrics based on the time of order receipt are 

measured against the NBBO from the consolidated market data feed. Exchange metrics based on time of order 

receipt are measured against the NBBO the exchange reports observing. Realized spreads for both exchange and 

wholesaler metrics are calculated with respect to the NBBO midpoint from the consolidated market data feed 

observed one minute after the time of order execution.  

Separately, for both the exchange and wholesaler samples, total share volume, total dollar volume, average 

transaction price, percentage volume metrics, and share weighted average dollar per share spread, price impact, 

and price improvement metrics were calculated at a stock-week-order size category level by aggregating together 

execution quality statistics calculated for individual orders. The order-size categories were defined as orders less 

than 100 shares, 100-499 shares, 500-1,999 shares, 2,000-4,999, 5,000-9,999 shares, and 10,000+ shares. For 
each stock-week-order size category, percentage spread, price impact, and price improvement metrics were 

calculated by dividing the average dollar per share metric by the average transaction price calculated for each 

stock-week-order size category.  E/Q ratios were calculated for each stock-week-order size category by dividing 

the average dollar per share effective spread by the average dollar per share quoted spread. 

Exchange sample metrics for E/Q ratios and percentage spread, price impact, and price improvement metrics for 

each stock-week-order size category were then merged with the corresponding stock-week-order size category in 

the wholesaler sample. Weighted averages for both wholesaler and exchange metrics and the wholesaler 

percentage volume metrics are then calculated for the security type in the sample by averaging across stock-week-

order size category levels based on their total dollar transaction volume during the sample period in the 

wholesaler CAT sample (i.e., for both exchanges and wholesalers, using the stock’s total dollar trading volume in 

wholesaler executed transactions as the weight when averaging the share weighted average stock-week- size 
category values). Weighting the exchange and wholesaler execution metrics by the same weights helps to ensure 

the samples are comparable across stocks. Total dollar volume and share volume for the exchange and wholesaler 

samples are calculated by summing across all executions in a security type in each sample. The wholesaler 

Principal Execution Rate is calculated for a security type in the wholesaler sample by summing the total dollar 

volume in trades wholesalers executed in a principal capacity across the security type in the wholesaler sample 

and dividing by the total dollar volume in trades in the security type in the wholesaler sample.  

 

In sum, analyses from Table 6 and Table 7 show that wholesaler realized spreads exceed 

exchange realized spreads for comparable marketable order transactions (e.g., similar stocks and 



228 

 

order sizes) on exchanges. If orders internalized by wholesalers were subject to competition from 

multiple liquidity suppliers at the individual order level,448 we would expect realized spreads to 

be similar to the realized spreads earned by liquidity providers of similar orders routed to 

exchanges.449 That is, the wholesaler could respond to the lower price impact (adverse selection 

risk) of its internalized orders by providing large enough price improvement so that its realized 

spread (potential profits) matched exchange realized spreads generated by the larger price impact 

(adverse selection risk) and smaller price improvement of orders executed by liquidity suppliers 

on exchanges. Since wholesaler price improvement is not commensurate their lower costs (i.e., 

smaller price impacts due to lower adverse selection risk), their realized spreads exceed 

exchange realized spreads. 

 Further evidence and granularity regarding the difference between wholesaler and 

exchange realized spreads are found in Table 8 and Table 9. Table 8 compares the execution 

quality between orders routed to wholesalers and exchanges and provides estimates of effective 

and realized spreads as well as price impacts and E/Q ratios for NMS common stocks and ETFs 

sorted into buckets based on their average dollar quoted spread. Realized spreads are also 

adjusted for per-share PFOF payments made by wholesalers and rebates paid by exchanges in 

order to account for the impact of these costs on potential economic profits. Differences in 

realized spreads between exchanges and wholesalers appear to be largest in stocks with quoted 

                                                
448  The analysis in Table 7 shows that 9.6% of executed dollar volume from orders routed to wholesalers may 

be effectively rerouted and potentially subject to competition at the individual order level. 

449  Despite receiving more price improvement, the analyses in supra Table 5, Table 6, and Table 7 show that 

individual investor orders sent to wholesalers still had significantly positive realized spreads, indicating 

their price improvement does not fully offset the lower adverse selection costs they pose. Thus, while the 

higher price impact of orders executed on exchanges compresses exchange realized spreads, one might 

expect (under competitive conditions) that the lower price impact of orders internalized by wholesalers 

would pressure wholesalers to provide sufficiently high price improvement such that wholesaler realized 

spreads would face a similar compression.  



229 

 

spreads less than 1.1 cents or stocks with quoted spreads greater than 5 cents (the buckets in 

which wholesalers earn the largest realized spreads). This appears to be partially driven by orders 

routed to wholesalers receiving the least price improvement (as measured by the E/Q ratio) in 

stocks with quoted spreads less than 1.1 cents and orders routed to exchanges receiving the most 

price improvement in stocks with quoted spreads greater than 5 cents.450  

                                                
450  Results also indicate that, after adjusting for exchange rebates, average exchange realized spreads are 

positive for stocks with average quoted spreads less than 1.1 cents, unlike stocks where average quoted 

spreads exceed 1.1 cents, which still have negative average realized spreads after adjusting for exchange 

rebates. It is possible that one-cent minimum tick size on exchanges limits competition in stocks with 

quoted spreads less than 1.1 cents, leading to higher realized spreads for these stocks. Furthermore, PFOF-

adjusted realized spreads are negative for stocks with quoted spreads less than 1.1 cents, unlike the realized 

spreads for stocks with wider quoted spreads, indicating that potential marginal economic profit is larger 

for these stocks. 



230 

 

Table 8: Estimates of Wholesaler and Exchange Execution Quality for Marketable Orders under $200,000 by 

Quoted Spread Range 

 Quoted Spread Bucket 

Variable < 1.1 cents 1.1 - 2 cents 
2 - 3 

cents 
3 - 5 cent 5+ cents 

WH Effective Spread (bps) 2.74 1.09 1.30 2.00 2.74 

EX Effective Spread (bps) 3.83 1.48 1.84 2.70 4.54 

WH E/Q Ratio 0.48 0.41 0.34 0.34 0.35 

EX E/Q Ratio 1.05 1.20 1.10 1.04 0.92 
WH Price Impact (bps) 1.76 0.73 0.93 1.30 1.43 

EX Price Impact (bps) 6.11 2.26 2.47 3.56 5.73 

WH Realized Spread (bps) 0.99 0.36 0.37 0.69 1.31 

EX Realized Spread (bps) -2.28 -0.78 -0.63 -0.85 -1.20 

WH Realized Spread Adj PFOF (bps) -0.15 0.12 0.17 0.50 1.22 

EX Realized Spread Adj Rebate (bps) 0.18 -0.21 -0.16 -0.38 -0.98 

This table uses the CAT retail analysis data and CAT exchange analysis data to estimate exchange and wholesaler 

effective spreads, price impacts, realized spreads, E/Q ratios and wholesaler and exchange realized spreads after 

accounting for exchange rebates and PFOF across all NMS stocks and ETFs for marketable orders under $200,000 

based on the stock’s average quoted spread. See supra Table 7 for additional details on how the sample and metrics 

are calculated. Stocks are grouped into buckets based off of their time weighted average quoted spread for a week as 

measured in NYSE TAQ. Share-weighted percentage metrics are averaged together at the individual stock-week-
order size category level for the exchange and wholesaler sample using the methodology in Table 7. Weighted 

averages for both wholesaler and exchange metrics are then calculated for each quoted spread bucket by averaging 

across stock-week-order size category levels based on their total dollar transaction volume during the sample period 

in the wholesaler CAT sample (i.e., for both exchanges and wholesalers, using the stock’s total dollar trading volume 

in wholesaler executed transactions as the weight when averaging the share weighted average stock-week-order size 

category values). Weighting the exchange and wholesaler execution metrics by the same weights helps to ensure the 

samples are comparable across stocks. 

Table 9 compares execution quality between wholesalers and exchanges and provides 

estimates of the effective and realized spreads as well as price impacts and E/Q ratios for stocks 

sorted into buckets based on their security type and then sub-sorted into buckets based on their 

price and, for Non-S&P 500 stocks and ETFs, into liquidity buckets based on their total share 

trading volume in a week. Once again, realized spreads are adjusted for (per-share) PFOF 

payments made by wholesalers and rebates paid by exchanges in order to account for their 

impact on potential economic profits. The results show that differences in realized spreads are 

larger in stocks with lower liquidity. This suggests that the isolation of individual investor orders 

due to wholesaler internalizations may result in larger losses in potential price improvement for 

individual investors on their orders in less liquid stocks. 



231 

 

Table 9: Estimates of Execution Quality for Marketable Orders under $200,000 by Stock Type, Price Group, and 

Liquidity Bucket 

Stock Type Price Group 

Liquidity 

Bucket 

WH 

Effectiv

e Spread 

(bps) 

EX 

Effectiv

e Spread 

(bps) 

WH E/Q 

Ratio 

EX E/Q 

Ratio 

WH 

Realized 

Spread 

(bps) 

EX 

Realized 

Spread 

(bps) 

WH 

Realized 

Spread Adj 

PFOF (bps) 

EX 

Realized 

Spread Adj 

Rebate 

(bps) 

S&P 500 1) <$30   1.18 2.47 0.45 1.01 0.67 -1.39 -0.14 -0.22 

S&P 500 2) $30-$100  
0.49 1.32 0.30 1.06 0.12 -0.62 -0.08 -0.18 

S&P 500 3) $100+   0.67 1.50 0.31 1.00 0.46 -0.15 0.39 -0.03 

Non-S&P 500 1) <$30 Low 56.26 53.61 0.72 0.94 28.98 -0.43 27.66 3.52 

Non-S&P 500 1) <$30 Medium 31.70 26.91 0.80 0.96 11.70 -8.69 9.91 -3.77 

Non-S&P 500 1) <$30 High 8.84 10.25 0.65 1.02 2.21 -6.61 0.12 -1.85 

Non-S&P 500 2) $30-$100 Low 22.91 23.60 0.54 0.92 11.83 0.12 11.71 0.57 

Non-S&P 500 2) $30-$100 Medium 7.81 10.03 0.44 0.95 4.31 -1.03 4.19 -0.59 

Non-S&P 500 2) $30-$100 High 2.64 4.89 0.38 0.97 0.76 -2.48 0.58 -1.99 

Non-S&P 500 3) $100+ Low 14.86 17.82 0.42 0.88 11.83 2.41 11.81 2.51 

Non-S&P 500 3) $100+ Medium 6.79 10.07 0.36 0.90 5.12 0.35 5.08 0.48 

Non-S&P 500 3) $100+ High 2.43 5.33 0.30 0.90 1.47 -0.56 1.41 -0.41 

ETF 1) <$30 Low 14.98 19.86 0.67 0.97 12.76 8.61 12.49 9.68 

ETF 1) <$30 Medium 11.69 15.23 0.62 0.96 9.52 4.89 9.29 5.96 

ETF 1) <$30 High 2.79 4.31 0.55 1.04 1.36 -1.39 0.62 0.20 

ETF 2) $30-$100 Low 8.06 10.62 0.59 0.94 6.98 4.62 6.88 5.10 

ETF 2) $30-$100 Medium 4.22 6.70 0.42 0.93 3.83 1.81 3.75 2.25 

ETF 2) $30-$100 High 0.66 1.43 0.40 1.12 0.51 -0.41 0.36 0.05 

ETF 3) $100+ Low 2.54 4.69 0.39 0.92 2.39 1.05 2.36 1.20 

ETF 3) $100+ Medium 1.21 2.34 0.33 0.98 1.17 0.02 1.15 0.16 

ETF 3) $100+ High 0.20 0.44 0.39 1.27 0.15 -0.10 0.12 -0.02 

This table uses the CAT retail analysis data and CAT exchange analysis data to estimate exchange and wholesaler effective 

spreads, realized spreads, E/Q ratios and wholesaler and exchange realized spreads after accounting for exchange rebates and 

PFOF across all NMS stocks and ETFs for marketable orders under $200,000 based on the stock’s type, VWAP, and traded 

share volume. See supra Table 7 for additional details on how the sample and metrics are calculated. Stocks are broken out 
into buckets based on their security type, price, and liquidity. Stock type is based on whether a security is an ETF, or a 

common stock in the S&P 500 or Non-S&P 500. Price buckets are based on a stock’s average VWAP price over a week as 

estimated from TAQ (see supra Table 7 for additional details). Stocks within each security type-price bucket, except S&P 

500 stocks, are sorted into three equal liquidity buckets based on the stock’s total share trading volume during the week 

estimated using TAQ data. Share-weighted percentage metrics are averaged together at the individual stock-week-order-size 

category level for the exchange and wholesaler sample using the methodology in Table 7. Weighted averages for both 

wholesaler and exchange metrics are then calculated for each security-type-price-liquidity bucket by averaging across stock-

week-order size category levels based on their total dollar transaction volume during the sample period in the wholesaler 

CAT sample (i.e., for both exchanges and wholesalers, using the stock’s total dollar trading volume in wholesaler executed 

transactions as the weight when averaging the share weighted average stock-week-order size category values). Weighting the 

exchange and wholesaler execution metrics by the same weights helps to ensure the samples are comparable across stocks. 

 

The previous section provided evidence that wholesalers earn greater realized spreads 

relative to exchanges and these differences are larger in less liquid stocks. In the following 



232 

 

section, we present additional evidence on the variation in execution quality that wholesalers 

provide to individual investor orders. 

 

Table 10 uses CAT retail analysis to summarize how individual investor marketable 

NMS stock order execution quality varies based on whether the wholesaler executes the order in 

a principal capacity (i.e., internalizes the order) or effectively reroutes the order (i.e., executes in 

a riskless principal or handles it in an agency capacity). This analysis supports the interpretation 

that wholesalers identify and tend to internally execute individual investor orders associated with 

the lower adverse selection costs.451 Internalized orders have a lower price impact (0.91 bps as 

compared to 4.63 bps for those effectively rerouted), and lower effective spreads (1.77 compared 

to 5.36 for other transactions). Wholesalers also earn higher realized spreads on the orders they 

execute as principal (0.86 bps for principal transactions compared to 0.72 bps earned by those 

providing liquidity for the riskless principal or agency transactions), despite executing them at 

lower effective spreads. 

 

                                                
451  Certain items in Table 10 may also be affected by MDI Rules once they are implemented. See supra notes 

356 and 421. 



233 

 

Table 10: Wholesaler CAT Analysis of Individual Investor Order Execution Quality by Wholesaler Execution 

Capacity 

Variable Internalized Effectively Rerouted 

Average Price $33.48 $14.78 

WH Orders (million) 236.95 34.36 

WH Trades (millions) 251.32 74.36 

WH Share Volume (billion shares) 70.28 16.83 

WH Pct of Executed Share Volume 80.68% 19.32% 

WH Dollar Volume (billion $) $2,352.80 $248.64 

WH Pct of Executed Dollar Volume 90.44% 9.56% 

WH Effective Spread (bps) 1.77 5.36 

WH Realized Spread (bps) 0.86 0.72 

WH Price Impact (bps) 0.91 4.63 

WH E/Q Ratio 0.35 0.70 

WH Pct Executed with Price Improvement 93.37% 57.65% 

WH Conditional Amount Price Improvement (bps) 2.45 3.74 

WH Pct Shares Executed at Midpoint or Better 46.05% 30.65% 

WH Pct Shares Executed at Midpoint 32.23% 26.53% 

WH Pct Shares Executed at NBBO 5.51% 35.49% 

WH Pct Shares Executed Outside NBBO 1.12% 6.86% 

WH Pct Shares Executed with <0.1 cent Price Improvement 20.38% 2.22% 

The table summarizes execution quality statistics from the CAT retail analysis based on whether the wholesaler 

executed the individual investor NMS stock order in a principal capacity or in another capacity (i.e., in an agency or 

riskless principal capacity). The majority of the other transactions are executed by the wholesaler in a riskless principal 

capacity. See supra Table 7 for additional details on the sample and metrics used in the analysis. Share-weighted 

percentage metrics are averaged together at the individual execution capacity-stock-week-order-size category level for 

the wholesaler sample using the methodology in Table 7. Weighted averages for the metrics are then calculated for 

each execution capacity by averaging across execution capacity-stock-week-order size category levels based on their 

total dollar transaction volume during the sample period in the wholesaler CAT sample. 

Table 11 provides data on the duration of time to execution for orders routed to 

wholesalers. While there is substantial variation in time to execution for both internalized orders 

and orders routed to other market centers, internalized order are executed more quickly, 

especially for orders with the slowest execution times (i.e., greater than or equal to the 75th 

percentile). The median execution time for rerouted orders was 24 milliseconds (0.024 seconds), 

about seven times longer than the median execution time for internalized orders, which equaled 

3.6 milliseconds (i.e., 0.0036 seconds). The execution time for the slowest 5% of internalized 



234 

 

orders was under 1.3 seconds, substantially faster than the slowest 5% of rerouted orders, which 

took around two minutes to execute. 

Table 11: Distribution of Share-Weighted Time-to-Execution (in milliseconds). 

Execution Capacity 5th Pctl 10th Pctl 25th Pctl 50th Pctl 75th Pctl 90th Pctl 95th Pctl 

Internalized 0.47 0.90 1.56 3.56 8.65 80.69 1,269.03 

Effectively Rerouted 2.00 4.55 10.38 24.36 2,983.30 35,166.76 119,284.18 

This table presents the time-to-execution of orders handled by wholesalers that are either internalized or effectively 

rerouted. Time-to-execution statistics are share weighed across observations. See supra Table 7 for additional details 

on the sample. 

 

While individual investor NMS stock orders are generally viewed as possessing less 

adverse selection risk than orders of other investors, there is nevertheless variation in adverse 

selection risk across this order flow.452 Table 12 shows the distribution of the average percentage 

price impact across 58 retail broker MPIDs in the CAT retail analysis in NMS Common Stocks 

and ETFs.453 The results indicate there is substantial variation in price impact across the order 

flow from different retail brokers, with the price impact of the 90th percentile retail broker’s 

orders being approximately 20 times greater than that of the 10th percentile retail broker’s orders 

and more than 4 times greater than the median retail brokers orders. 

                                                
452  Certain retail brokers tend to have more sophisticated customers than other retail brokers. Order flow from 

these retail brokers carries greater adverse selection risk, while order flow from retail brokers with 

generally less sophisticated customers carries less adverse selection risk. For the purposes of this release, 

the Commission discusses retail brokers as carrying different levels of adverse selection risk, although this 
is actually a description of the order flow of the customer base of these retail brokers, not the actual retail 

brokers. 

453  Certain items in Table 12 may also be affected by the amendments in the MDI Adopting Release once they 

are implemented. See supra notes 356 and 421. 



235 

 

Table 12: Distribution of Individual Retail Broker-Dealer Average Percentage Price Impact (bps) in quality in NMS 

Common Stocks and ETFs during Q1 2022 

N Mean Std Dev Min 10th Pctl 25th Pctl 50th Pctl 75th Pctl 90th Pctl Max 

58 1.07 2.35 -12.34 0.16 0.43 0.83 1.39 3.38 7.00 

This table summarizes the distribution of the retail broker MPID’s average price impact for the 58 retail broker MPIDs in 

the CAT retail analysis in NMS Common Stocks and ETFs. Each Retail Broker MPID’s price impact is determined by 

share weighting their average percentage price impact half spread within an individual NMS common stock or ETF and 

then averaging across stocks using the weighting of the dollar volume the retail broker MPID executed in each security 

(Dollar Volume weighted). See supra Table 7 for additional details on the sample and metrics used in the analysis. NMS 

Common stocks and ETFs are identified, respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’. 

Analysis suggests that wholesalers tend to provide lower execution quality to retail 

brokers that have higher adverse selection costs (i.e., price impact). Table 13 sorts the 58 retail 

broker MPIDs in the CAT retail analysis in NMS Common Stocks and ETFs into quintiles based 

on their price impact.454 The results indicate that the orders of retail brokers in the higher adverse 

selection quintiles handled by wholesalers receive worse execution quality, as measured by 

higher effective spreads and E/Q ratios, than the orders of retail brokers in the lower adverse 

selection quintiles.455 More specifically, the E/Q ratio of the broker-dealers with the highest price 

impact (quintile 5) is more than twice as large as the E/Q ratio of the broker-dealers with the 

lowest price impact (quintile 1). 

                                                
454  Certain items in Table 13 may also be affected MDI Rules once they are implemented. See supra notes 356 

and 421. 

455  Several recent working papers also found that price improvement varies across retail brokers; see 

Christopher Schwarz et al., The ‘Actual Retail Price’ of Equity Trades (last revised Sept. 15, 2022) 

(unpublished manuscript), available at https://ssrn.com/abstract=4189239 (retrieved from Elsevier 

database) (“Schwarz et al. (2022)”); and Bradford Lynch, Price Improvement and Payment for Order Flow: 
Evidence from A Randomized Controlled Trial (last revised Oct. 3, 2022) (unpublished manuscript), 

available at https://ssrn.com/abstract=4189658 (retrieved from Elsevier database) (“Lynch (2022)”). These 

studies only included trades that were initiated by the authors, and do not include other trades that were 

handled by the brokers in their samples. In contrast, the Commission’s analysis is based on the data 

reflecting all orders routed by 58 brokers.  

https://ssrn.com/abstract=4189239
https://ssrn.com/abstract=4189658


236 

 

Table 13: Execution quality in NMS Common Stocks and ETFs for Retail Brokers sorted into quintiles based on their 

Average Percentage Price Impact (bps) 

BD Average Price 
Impact Quintile 

Avg WH Price 
Impact (bps) 

Avg WH Principal 
Execution Rate 

Avg WH Effective 
Spread (bps) 

Avg WH Realized 
Spread (bps) 

Avg WH E/Q 
Ratio  

1 -1.04 88.62% 2.86 3.90 0.43 

2 0.48 86.63% 1.87 1.39 0.46 

3 0.79 88.65% 2.15 1.36 0.48 

4 1.32 83.86% 3.48 2.17 0.61 

5 3.85 64.01% 7.24 3.39 0.88 

This table summarizes how execution quality varies in NMS Common Stocks and ETFs based on a retail broker MPID’s price 

impact by grouping the 58 retail broker MPIDs in the CAT retail analysis in NMS Common Stocks and ETFs into quintiles 

based on their average price impact. Each Retail Broker MPID’s price impact is determined by share weighting its average 

percentage price impact within an individual NMS common stock or ETF and then averaging across stocks using the 

weighting of the dollar volume the retail broker executed in each security (Dollar Volume weighted). Average price impacts, 

effective spreads, realized spreads, and E/Q ratios are also calculated for each retail broker MPID by share weighting within 

an individual NMS common stock or ETF and then averaging across stocks using the weighting of the dollar volume the retail 

broker MPID executed in each security (Dollar Volume weighted). The E/Q ratio is the share weighted average of the ratio of 

each transaction’s effective spread divided by its quoted spread at the time of order receipt. Retail broker MPIDs are sorted 
into quintiles based on their average percentage price impact (bps) and then averages for each quintile are determined by 

equally weighting the average statistic for each retail broker MPID. See supra Table 7 for additional details on the sample and 

metrics used in the analysis. NMS Common stocks and ETFs are identified, respectively, as securities in TAQ with a Security 

Type Code of ‘A’ and ‘ETF. This analysis uses data from prior to the implementation of the MDI Rules and specific numbers 

may differ following the implementation of the MDI Rules. See infra section VII.B.7. 

 

 

Although wholesalers provide individual investor orders with price improvement relative 

to exchanges, the magnitude of this price improvement is not uniform across retail brokers. The 

previous section provided evidence of variation in execution quality based on adverse selection 

risk. There is also evidence that execution quality varies based on whether the retail broker 

receives PFOF for NMS stock orders. Commission analysis in this section shows that the PFOF a 

wholesaler pays to a retail broker affects the price improvement wholesalers provide, and 



237 

 

wholesalers provide worse execution quality to broker-dealers whose customers’ orders pose a 

greater adverse selection risk. 456 

Commission analysis presented in Table 14 compares average execution quality for 

PFOF and non-PFOF brokers for marketable orders of individual investors under $200,000 in 

NMS Common stocks and ETF orders that are routed to wholesalers.457 Results are divided 

between orders that were executed on a principal basis (i.e., internalized) and those executed via 

other methods (the majority of which are in a riskless principal capacity). 

                                                
456  Schwarz et. al. (2022) do not find a relationship between the amount of PFOF a retail broker receives and 

the amount of price improvement their customers’ orders receive. However, they noted that the variation in 

the magnitude of price improvement they saw across retail brokers was significantly greater than the 

amount of PFOF the retail broker received, which could indicate their sample was not large enough to 

observe a statistically significant effect. Similarly, the difference we observe between the effective spreads 

of PFOF and non-PFOF brokers infra Table 14 is significantly smaller than the differences observed across 

broker-dealers in supra Table 13. Lynch (2022) reports a broker deriving high PFOF revenues provides 

small price improvements to customer orders, while a broker deriving low PFOF revenue offers large price 

improvement. Importantly, both studies only included trades that were initiated by the authors and do not 

include other trades that were handled by the brokers in their samples, preventing them from examining the 
attributes of a typical retail order handled by each broker. As such, these studies would not observe the 

variation in price improvements that reflect differences in the adverse selection risk associated with the 

order flow of different brokers, and hence, would likely conflate the impacts of PFOF with that of adverse 

selection risk. That is, these studies cannot control for the possibility that a wholesaler would offer smaller 

price improvement to order flows with higher adverse selection risk. In contrast, the Commission relies on 

CAT data to examine the adverse selection risk at the broker level, which is a determinant of the amounts 

of price improvements that a given wholesaler would offer to different brokers. The regression framework 

in Table 15 controls for the adverse selection risk of the retail broker and finds that is has a negative 

relationship with the magnitude of price improvement their customers’ orders receive. We also find a 

negative relationship between the amount of PFOF a broker-dealer receives and the magnitude of the price 

improvement their customers’ orders receive after controlling for the retail broker adverse selection risk. 

457  Some brokers that do not accept PFOF for orders in equities accept PFOF for orders in options. Certain 
items in Table 14 may also be affected by MDI Rules once they are implemented. See supra notes 356 and 

421. 



238 

 

Table 14: Comparison of PFOF and Non-PFOF Broker Execution Quality in NMS Common Stocks and ETFs 

 Principal Transactions Other Transactions 

 Non-PFOF PFOF Non-PFOF PFOF 

Average Price $41.79 $31.35 $23.90 $12.47 

WH Share Volume (billion shares) 14.32 55.96 3.40 13.43 

WH Dollar Volume (billion $) $598.44 $1,754.36 $81.23 $167.41 

Pct of Executed Dollar Volume 23.00% 67.44% 3.12% 6.44% 

WH Effective Spread (bps) 1.50 1.86 4.57 5.75 

WH Realized Spread (bps) 0.88 0.85 0.83 0.66 

WH Realized Spread Adj PFOF (bps) 0.88 0.43 0.83 -0.55 

WH Price Impact (bps) 0.62 1.01 3.74 5.07 

WH E/Q Ratio 0.30 0.37 0.78 0.67 

WH Pct Executed with Price Improvement 90.59% 94.32% 46.89% 62.87% 

WH Conditional Amount Price Improvement (bps) 2.75 2.34 2.31 4.30 

The table summarizes execution quality statistics from the CAT retail analysis in Common Stocks and ETFs based on 

whether the retail broker MPID receives PFOF from wholesalers (PFOF) or does not (Non-PFOF) and whether the 
wholesaler executed the individual investor order in a principal capacity or in another capacity (i.e., in an agency or riskless 

principal capacity). A broker-dealer MPID was determined to be a PFOF broker if the broker-dealer reported receiving PFOF 

on its Q1 2022 606 report, or if the report of its clearing broker reported receiving PFOF in the event that the broker did not 

publish a Rule 606 report. Broker-dealers or clearing brokers that handled orders on a not held basis and did not disclose 

PFOF information in their Rule 606 report were classified as PFOF brokers if disclosures on their websites indicated they 

received PFOF. Twenty-two MPIDs belonging to 19 retail brokers were classified as receiving PFOF. The majority of the 

other transactions are executed by the wholesaler in a riskless principal capacity. See supra Table 7 for additional details on 

the sample and metrics used in the analysis. Share-weighted percentage metrics are averaged together at the individual PFOF 

-execution capacity-stock-week-order-size category level for the wholesaler sample using the methodology in Table 7. 

Weighted averages for the metrics are then calculated for each PFOF-execution capacity category by averaging across 

execution capacity-stock-week-order size category levels based on their total dollar transaction volume during the sample 

period in the wholesaler CAT sample. 

 

The results in Table 14 show that wholesaler internalized orders (Principal Transactions) 

originating from PFOF brokers are associated with (1) higher effective spreads, (2) higher E/Q 

ratios, and (3) slightly smaller price improvement on orders that achieved at least some price 

improvement (WH Conditional Amount Price Improvement), relative to wholesaler internalized 

orders originating from non-PFOF brokers. However, the results also show that orders 

internalized from non-PFOF brokers also have lower adverse selection risk and similar realized 

spreads (before PFOF is paid), indicating the lower adverse selection risk could help explain 

differences in the observed execution quality. 



239 

 

Because the results in Table 14 are averages across broker-dealers, they cannot 

disentangle the effects of PFOF on execution quality from differences in the adverse selection 

risk of different broker-dealers.458 In order to control for these differences, the Commission 

analyzed the effects of PFOF and differences in broker-dealer adverse selection risk on execution 

quality in a regression framework that controls for other factors that could affect the price 

improvement provided by wholesalers. 

Table 15 displays regression results from Commission CAT retail analysis of NMS 

Common stock and ETF orders.459 The regression tests whether there is a statistically significant 

relationship between execution quality and the amount of PFOF a broker-dealer receives and 

includes several individual stock- and market-level controls460 as well as the retail broker’s 

average price impact and size (as measured by percent of executed individual investor dollar 

volume). Four different measures of execution quality are used for the dependent variable, 

including E/Q ratio, effective spread, realized spread, and price improvement.461 The results in 

                                                
458  They also cannot disentangle the effects of differences in the stocks traded by PFOF and non-PFOF 

brokers.  

459  Certain items in this Table 15 may also be affected by the amendments in the MDI Rules once they are 

implemented. See supra notes 356 and 421. 

460  Broker-dealer cents per 100 shares PFOF rates (dollar PFOF rates) are determined from their Q1 2022 Rule 

606 reports (see supra Table 2) or the Rule 606 reports of its clearing broker reported receiving PFOF in the 

event that the broker did not publish a Rule 606 report. A PFOF rate of 20 cents per 100 shares was used 

for the introducing broker-dealers and clearing broker that reported handled orders on a not held basis and 

did not disclose PFOF information in their Rule 606 report but disclosed on their website that they received 
PFOF for their order flow. 20 cents per 100 shares was the PFOF rate that the clearing broker that handles 

orders on a not held basis disclosed on their website that they received. Twenty-two MPIDs belonging to 

19 retail brokers were classified as receiving PFOF. Dollar PFOF rates for each retail broker were merged 

with the corresponding stock (S&P 500 and non-S&P 500) and order type in the CAT sample. For the 

regressions in Table 15, percentage PFOF rates are estimated in basis points by dividing the PFOF cents 

per 100 share values from Rule 606 reports (after converting them to dollar per share values) by the stock-

week VWAP for the security in the CAT sample. Stock-level controls include average share volume, 

VWAP, return, average effective spread, average realized spread, and average quote volatility during a 

week. Market-level controls include market volatility, market return, and the market’s average daily trading 

volume during week. 

461  The regression also includes variables to control for differences in execution quality across different 

wholesalers and across different order size categories. The analysis examines trades in Q1 2022 that 



240 

 

Table 15 show that the Table 14 results indicating brokers that receive PFOF receive inferior 

execution quality are robust to the inclusion of controls for differences in the type of order flow 

coming from different broker-dealers. 

Table 15: Regression Analysis showing Relationship Between Execution Quality and PFOF in NMS 

Common Stocks and ETFs 

  (1) (2) (3) (4) 

VARIABLES 

E/Q 

 Ratio 

Effective spread 

(bps) 

Realized spread 

(bps) 

Amount Price 

Improvement 

(bps) 

          

PFOF Rate 0.0132*** 0.217*** 0.211*** -0.170*** 

 
[2.82] [6.31] [7.13] [-5.52] 

Stock Share Volume 0.0379 -0.0462 -0.886* -0.533** 

 
[0.51] [-0.14] [-1.65] [-2.53] 

Stock VWAP -0.000028 0.000233 -0.000450 0.000014 

 
[-1.06] [0.61] [-0.78] [0.04] 

Stock Return -0.000273 -0.0200* -0.0120 0.00840 

 
[-0.21] [-1.93] [-0.36] [0.84] 

VIX 0.00968*** 0.0122* 0.0607*** -0.000256 

 
[7.29] [1.79] [2.85] [-0.05] 

Market Return -0.00710** 0.00787 0.00686 -0.0150 

 
[-2.02] [0.36] [0.15] [-0.96] 

Market Dollar Volume 0.0306*** 0.0641*** 0.164*** -0.0390*** 

 
[9.70] [3.44] [3.07] [-2.69] 

Stock Avg Effective spread 0.00700*** 0.122*** -0.0455* 0.00746 

 
[3.34] [6.07] [-1.94] [0.52] 

Stock Avg Realized spread -0.00169* -0.00902 0.0730*** -0.00552 

 
[-1.87] [-1.45] [2.98] [-1.48] 

Stock Quote Volatility 0.457** 2.232 -1.799 4.458** 

 
[2.09] [1.05] [-0.65] [2.03] 

Broker-Dealer Average 

Price Impact 

0.145*** 0.414*** 0.316*** -0.417*** 

 
[14.74] [9.83] [8.50] [-10.21] 

                                                
wholesalers execute in a principal capacity from market and marketable limit orders from individual 

investors that are under $200,000 in value and are in NMS Common stocks and ETFs. See supra Table 7 

for further discussion on the sample. The unit of observation for the regression is the average execution 

quality provided to trades that are aggregated together based on having the same stock, week, order type, 

order size category, wholesaler, and retail broker MPID. The coefficients are estimated by weighting each 

observation by the total dollar volume of trades executed in that observation.241 

 

Broker-Dealer Pct Volume -2.45e-05 -0.00207* -0.00546*** 0.000124 

 [-0.07] [-1.76] [-3.77] [0.12] 

Average Trade Qspread -0.00720*** 0.517*** 0.378*** 0.392*** 

 
[-10.12] [19.78] [10.84] [21.14] 

     

Wholesaler Fixed Effects Yes Yes Yes Yes 

Order Size Category Fixed 

Effects Yes Yes Yes Yes 

Stock Fixed Effects Yes Yes Yes Yes 

Observations 13,365,122 13,365,122 13,365,122 12,453,440 

Adjusted R-squared 0.279 0.574 0.060 0.594 

This table presents the results of a regression analysis examining the effect of retail brokers receiving PFOF from 

wholesalers on levels of price improvement and the execution quality of their customers’ orders when the 

wholesaler internalizes the order on a principal basis.  

The analysis examines trades in Q1 2022 that wholesalers execute in a principal capacity from market and 

marketable limit orders from individual investors that are under $200,000 in value and are in NMS Common 

stocks and ETFs. See supra Table 7 for further discussion on the CAT retail sample. The unit of observation for 

the regression is the average execution quality provided to trades that are aggregated together based on having the 

same stock, week, order type, order size category, wholesaler, and retail broker MPID. Weighted regression are 
performed based on the total dollar value executed by the wholesaler in that observation (i.e., total shares 

executed for all orders that fit within that stock-week-retail broker-wholesaler-order type-order size category). 

This means that the regression coefficients capture the effect on execution quality on a per-dollar basis.  

Dependent variables include: the average E/Q ratio of the shares traded; the average percentage effective spread 

of the shares traded measured in basis points; the average percentage realized spread of the shares traded 

measured in basis points; and the average percentage value of the amount of price improvement measured in 

basis points, conditional on the order being price improved. These variables are from the CAT retail analysis and 

described in supra Table 7.   

Explanatory variables include: PFOF Rate is the retail brokers’ PFOF rates in bps (the per share rates were 

determined from retail broker Rule 606 reports and divided by the VWAP of the executed shares in the sample to 

determine the PFOF rate on a percentage basis, see supra note 460); Broker-Dealer Pct Volume is the retail 
broker size (in terms of percentage total executed dollar trading volume in the sample); Stock Share Volume is 

the stock’s total traded share volume during the week (from TAQ in billions of shares); Stock VWAP is the 

VWAP of stock trades during the week (from TAQ); Stock Return is the stock’s return during the week (from 

CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); VIX is the average 

value of the VIX index during the week (from CBOE VIX data); Market Return is the average CRSP value 

weighted market return during the week, Market Dollar Volume is the total market dollar trading volume during 

the week (from CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); Stock 

Avg Effective spread is the stock’s share weighted average percent effective half spread during the week 

measured in basis points (from TAQ); Stock Avg Realized spread is the stock’s share weighted average percent 

realized half spread during the week measured in basis points (from TAQ); Stock Quote Volatility is the stock’s 

average 1 second quote midpoint volatility measured in basis points (from TAQ); Broker-Dealer Average Price 

Impact is the retail broker’s average price impact over the sample measured in basis points (see supra Table 12 
for more details on how the metric is calculated); Average Trade Qspread is the average percentage quoted half 

spread at the time of order submission for orders in that stock-week-retail broker-wholesaler-order type-order size 

category measured in basis points; wholesaler fixed effects (i.e., indicator variables for each wholesaler that 

control for time-invariant execution quality differences related to each wholesaler); order-size category fixed 

effects (i.e., indicator variables for each order-size category that control for time-invariant execution quality 

differences related to order-size category); and individual stock fixed effects (i.e., indicator variables for each 

stock that control for time-invariant execution quality differences related to individual stocks). The order size 

categories include less than 100 shares, 100-499 shares, 500-1,999 shares, 2,000-4,999, 5,000-9,999 shares, and 

10,000+ shares. Brackets include t-statistics for the coefficients based on robust standard errors that are clustered 



242 

 

at the stock level. ***, **, and * indicate the t-statistics for the coefficients are statistically significant at the 0.01, 

0.05, and 0.1 levels, respectively.  

This analysis uses data from prior to the implementation of the MDI Rules and specific numbers may be different 

following the implementation of the MDI Rules. See supra note 356 and section VII.B.7. 

Regression results in Table 15 support the conclusion that wholesalers provide worse 

execution quality to brokers that receive more PFOF.462 The coefficients on the PFOF Rate 

variable indicates that, all else equal, for the orders wholesalers internalize, execution quality 

declines as the amount of PFOF paid to the retail broker increases. Orders from retail brokers 

that receive a greater amount of PFOF have higher E/Q ratios and effective spreads and receive 

less price improvement. The regression results (as measured by the coefficient on the PFOF Rate 

variable) indicate that, all else equal, wholesalers earn higher realized spreads on orders for 

which they pay more PFOF. Note that PFOF is not taken out of the realized spread measure, so 

the realized spread proxies for wholesaler’s economic profits before any fees are taken out. 

Regression results in Table 15 also show that the retail broker’s adverse selection risk (as 

measured by the coefficient on the Broker-Dealer Average Price Impact variable) has a 

statistically significant effect on the execution quality wholesalers give on trades they internalize. 

The positive coefficient indicates that wholesalers provide worse execution quality to broker-

dealers whose customers’ orders pose a greater adverse selection risk.  

In sum, Commission analysis indicates that wholesalers deliver execution quality that 

varies across broker-dealers based on their adverse selection risk. Wholesalers also deliver 

execution quality that varies based on characteristics of the order (lot size, principal capacity vs. 

riskless principal or agency capacity, market vs. marketable limit, S&P 500 vs. non-S&P 500). 

                                                
462  While results from the regression analysis indicate that orders routed by PFOF-brokers receive reduced 

execution quality from wholesalers, there could be ways that PFOF is indirectly passed on to customers by 

their retail brokers. However, the Commission lacks evidence on the extent to which this is occurring. 

 



243 

 

The business model of wholesalers relies on their ability to parse the adverse selection risk of 

individual investors’ orders based on these numerous characteristics and to deliver some price 

improvement while still generating the potential for high profits for themselves in the form of a 

high realized spread. The lack of additional price improvement that could otherwise be provided 

to individual investors stems from the isolation of marketable orders by wholesalers, which 

results in a lack of order-by-order competition.  

 

Wholesalers do not charge retail brokers for the routing and execution that they provide, 

and pay a segment of these brokers PFOF for the right to handle their order flow. Proposed Rule 

615 could therefore impact retail brokers as well as wholesalers, due to their interdependence. In 

order to analyze the economic effects of the Proposal on retail brokers, we first provide relevant 

detail of the retail broker industry. 

There are approximately 2,440 retail brokers in the U.S., earning quarterly revenues of 

approximately $86.7 billion and handling 228.9 million customer accounts.463 Retail brokers 

provide a range of services that assist their customers in the purchase of securities, which include 

stocks, bonds, mutual funds, ETFs, options, futures, foreign exchange, and crypto asset 

securities. Proposed Rule 615, however, would cover only NMS stocks, and many customer 

accounts include assets that include or exclusively contain securities that are not NMS stocks. 

The Commission does not know what share of these accounts contain exclusively NMS stocks, 

but estimates that approximately 1,000 retail brokers originated NMS stock orders from 

individual investors in 2021.464 

                                                
463  Data are from Q2 2022, FOCUS Part II Schedule SSOI. 

464  This number is estimated using CAT data for broker-dealers that originated an order from an “Individual 

Customer” CAT account type in 2021. This larger sample is refined down to a sample of 54 broker-dealers 



244 

 

Retail broker services are sometimes divided into two generally defined categories: 

“discount brokers” and “full-service” brokers. Discount brokers typically provide commission-

free trading for online purchases of stocks and ETFs, but often charge fees for purchases of other 

securities. Some discount brokers manage proprietary mutual funds and ETFs, which earn them 

revenue (based on the funds’ “expense ratio”) paid by the investors that purchase these funds. 

Full-service brokers (as they are commonly called and as used in this release) typically charge 

commissions and advisory fees, frequently as a share of the client's total assets under 

management, in exchange for more detailed financial guidance. 

Retail brokers distinguish themselves by the range of securities that they sell, as well 

accessibility and functionality of their trading platform, which can be geared towards less 

experienced or more sophisticated investors. Discount brokers can also differentiate themselves 

by providing more extensive customer service as well as tools for research and education on 

financial markets.  

 

Most marketable orders of individual investors are routed by retail brokers to 

wholesalers. Wholesalers do not directly charge retail brokers for their order routing and 

execution and pay PFOF to some of these retail brokers in exchange for this order flow. 

Wholesalers paid $235 million in PFOF in NMS stocks in Q1 2022.465 

Table 16 below indicates that a single firm received more than 43% of all PFOF 

stemming from NMS stock orders during Q1 2022. Furthermore, the number one and number 

                                                
fort the CAT data analysis presented above, beginning in supra Table 7. See supra note 441 for a 

description of how the sample of 54 brokers was chosen.  

465  In NMS stocks in Q1 2022, wholesalers paid $94 million in PFOF for market orders, $53 million for 

marketable limit orders, $69 million for non-marketable limit orders, and $19 million for other order types.  



245 

 

four firms on this list merged in 2020, implying that a single firm received slightly more than 

55% of all PFOF stemming from NMS stock orders. Along with this firm, the other three firms 

at the top of this list collectively received almost 94% of all PFOF from NMS stocks. 

Table 16: Top Broker-Dealer Recipients of PFOF from NMS stocks and Total Revenue 

 PFOF  

Received 

(Q1 2022-) 

Total Firm 

Revenue 

(Q1 2022-) 

PFOF  

Share of  

Revenue 

Share of  

Total PFOF  

Disbursed 

     

BD1 $101,509,456 $1,766,885,957 5.7% 43.12% 

BD2 $35,019,397 $403,037,037 8.7% 14.88% 

BD3 $32,611,006 $435,731,084 7.5% 13.85% 

BD4 $28,919,376 $1,876,198,891 1.5% 12.28% 

BD5 $22,816,637 $94,176,227 24.2% 9.69% 

BD6 $7,810,943 $50,207,346 15.6% 3.32% 

BD7 $4,123,125 $64,850,454 6.4% 1.75% 

BD8 $835,652 $10,855,447 7.7% 0.35% 

BD9 $696,482 $9,406,401 7.4% 0.30% 

BD10 $590,124 $12,341,917 4.8% 0.25% 

BD11 $268,754 $499,731 53.8% 0.11% 

BD12 $145,943 $38,249,831 0.4% 0.06% 

BD13 $68,552 $19,462,153 0.4% 0.03% 

BD14 $4,122 $4,977,874 0.1% 0.002% 

     

This table includes data from Rule 606 reports and lists all PFOF payments stemming from NMS stock orders 

paid by wholesalers to broker-dealers. The Commission analyzed Rule 606 reports for the most active 50 broker-
dealers, and the summary payments to the fourteen firms in the table above represent all PFOF payments made by 

wholesalers for NMS stock orders during Q1 2022. The table also contains the total revenue earned by these 

firms during the same period. The PFOF share of revenue is calculated by dividing PFOF by revenue for each 

broker-dealer. 

Table 16 also reveals that dependence on PFOF as a source of revenue is not equally 

shared among these firms. The average PFOF share of revenue of these firms is 9.6%. However, 

setting aside the disproportionately high PFOF revenue share of 53.8% from the smallest firm 

(by revenue) on this list, the average share of revenue stemming from PFOF falls to 6.5%. This is 

almost identical to the median PFOF revenue share of 6.4%. 



246 

 

Besides receiving different overall disbursements of PFOF revenue, broker-dealers 

receive different PFOF rates. Table 17 below displays the distribution of PFOF rates (in cents per 

100 shares) paid by wholesalers to retail brokers. 

Table 17: Distribution across PFOF Brokers of Average Rule 606 Payment Rates from Wholesalers for Q1 2022 (cents 

per 100 shares) 

 

Distribution 
statistic Market Orders 

Marketable 
Limit Orders 

Non-

Marketable 
Limit Orders Other Orders 

S&P 500 

Average 40.3 37.8 49.7 43.1 

Min 7.0 6.5 6.1 4.8 

25th Pct 14.4 14.4 15.0 11.5 

Median 15.0 16.0 28.6 16.6 

75th Pct 22.0 22.4 32.4 22.2 

Max 280.7 247.6 338.0 310.8 

Non S&P 
500 

Average 14.7 11.9 18.5 11.6 

Min 6.2 3.3 4.6 2.1 

25th Pct 11.1 9.4 13.2 8.2 

Median 13.7 10.9 18.2 9.9 

75th Pct 18.8 14.4 25.1 17.0 

Max 22.7 20.9 28.9 18.6 

Combined 

Average 16.2 12.7 20.1 13.2 

Min 6.3 3.4 4.6 2.5 

25th Pct 11.3 9.9 13.6 8.3 

Median 13.8 12.1 21.9 10.4 

75th Pct 21.5 15.7 28.3 19.1 

Max 36.4 21.0 31.0 27.2 

This table displays the distribution across retail brokers (that received PFOF from wholesalers) of average PFOF payment rates 

from wholesalers for Q1 2022 (cents per 100 shares). The data were obtained by analyzing rule 606 Reports from the 14 BDs 

that accepted PFOF from wholesalers. The table shows the distribution of PFOF rates broken down by S&P 500 and non-S&P 

500 stocks, across market orders, marketable limit orders, non-marketable limit orders, and other orders that retail brokers route 

to different types of venues in Q1 2022. See supra Table 2 for additional details on the sample. 

PFOF rates vary along several dimensions. For marketable orders, including market and 

marketable limit orders, the combined median rate in Table 17 is 12-14 mils, significantly less 

than the median rate for the non-marketable orders median rate of 22 mils. In addition, variation 

is wider in non-marketable limit orders, with a wider range between the 25th and 75th percentile 

compared to market and marketable limit orders. It is also evident that the maximum values in 



247 

 

S&P 500 stocks, all of which are above 200 mils, are far greater than non-S&P 500 stocks, all of 

which are below 35 mils, and those higher maximum values may be driven by the fact that two 

particular firms that get PFOF rates proportional to the bid-ask spread. 

 

Retail brokers have numerous sources of revenue, including commissions, account 

management and advisory fees, interest income, as well as PFOF. Retail brokers that currently 

receive PFOF tend to earn a somewhat larger share of their revenue from interest on margin 

loans provided to clients. Lending rates tend to be highest for margin amounts under $25,000, 

and fall successively as the size of the loan increases, with the lowest rates on loans exceeding $1 

million. PFOF brokers earned 12% of their income from margin interest in 2021, compared to 

only 1.6% of revenue earned by non-PFOF brokers during the same period.466 Another source of 

revenue is securities borrowing, making up 5.1% of revenues for PFOF brokers and 0.9% of non-

PFOF brokers revenue during 2021. In contrast, other revenue lines are relatively underutilized 

by PFOF brokers, such as account supervision fees, which made up 1.3% of revenue for PFOF-

brokers but 26.5% of non-PFOF brokers. 

                                                
466  Statistics on broker-dealer revenues are from their FINRA Supplemental Statement of Income Form for 

2021. The sample in this discussion is limited to 54 retail brokers that were identified in the CAT analysis 

in Table 7. 19 of these 54 broker-dealers were identified as a PFOF broker if they reported receiving PFOF 

on their Q1 2022 606 report, or if the report of their clearing broker reported receiving PFOF in the event 

that the broker did not publish a Rule 606 report. Broker-dealers or clearing brokers that handled orders on 

a not held basis and did not disclose PFOF information in their Rule 606 report were classified as PFOF 

brokers if disclosures on their websites indicated they received PFOF. The remaining 35 firms comprise the 
sample of non-PFOF brokers. We use the broad definition of sales as we preliminarily believe that many 

firms will just mark “sales” if they have both retail and institutional activity. However, we note that this 

may capture some broker-dealers that do not have retail activity, although we are unable to estimate that 

frequency. 



248 

 

 

In 2020, the Commission adopted a new rule and amended existing rules to establish a 

new infrastructure for consolidated market data,467 and the regulatory baseline in this proposal 

includes these changes to the current arrangements for consolidated market data. However, as 

discussed in more detail above, the MDI Rules have not been implemented, and so they have not 

yet affected market practice.468 As a result, the data used to measure the baseline below reflects 

the regulatory structure in place for consolidated market data prior to the implementation of the 

MDI Rules.469 Accordingly, this section will discuss the Commission’s assessment of the 

potential effects that the implementation of the MDI Rules could have on the baseline 

estimations. 

Among other things, the unimplemented MDI Rules update and expand the content of 

consolidated market data to include: (1) certain odd-lot information470; (2) information about 

certain orders that are outside of an exchange’s best bid and best offer (i.e., certain depth of book 

data)471; and (3) information about orders that are participating in opening, closing, and other 

auctions.472 The rules also introduced a four-tiered definition of round lot that is tied to a stock’s 

average closing price during the previous month.473 For stocks with prices greater than $250, a 

                                                
467  The MDI Rules expanded the data that will be made available for dissemination within the national market 

system (“NMS data”). See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR at 18613.  

468  For more information about the implementation timeline for the MDI Rules, see supra section III.B.1.b.i. 

469  For more information about the regulatory structure for consolidated market data prior to the 

implementation of the MDI Rules, see supra section III.B.1.a. 

470  See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR at 18613. The Commission outlined a phased 

transition plan for the implementation of the MDI Rules, including the implementation of odd-lot order 

information. See MDI Adopting Release, 86 FR at 18698-701. 

471  See MDI Adopting Release, 86 FR at 18625. 

472  See MDI Adopting Release, 86 FR at 18630. 

473 See MDI Adopting Release, 86 FR at 18617. 



249 

 

round lot is defined as consisting of between 1 and 40 shares, depending on the tier.474 The rules 

also introduce a decentralized consolidation model under which competing consolidators, rather 

than the existing exclusive SIPs, will collect, consolidate, and disseminate certain NMS 

information.475 

Given that the MDI Rules have not yet been implemented, they likely have not affected 

market practice and therefore data that would be required for a comprehensive quantitative 

analysis of a baseline that includes the effects of the MDI Rules is not available. It is possible 

that the baseline (and therefore the economic effects relative to the baseline) could be different 

once the MDI Rules are implemented. The following discussion reflects the Commission’s 

assessment of the anticipated economic effects of the MDI Rules as described in the MDI 

Adopting Release.476 

The Commission anticipated that, for stocks priced above $250, the new round lot 

definition will mechanically narrow NBBO spreads for most stocks with prices greater than 

$250.477 This could cause statistics that are measured against the NBBO to change because they 

will 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 will be measured 

                                                
474  See id. The Commission adopted a four-tiered definition of round lot: 100 shares for stocks priced $250.00 

or less per share, 40 shares for stocks priced $250.01 to $1,000.00 per share, 10 shares for stocks priced 

$1,000.01 to $10,000.00 per share, and 1 share for stocks priced $10,000.01 or more per share. 

475  See MDI Adopting Release, 86 FR at 18637. 

476  See MDI Adopting Release, 86 FR at 18741-18799. 

477  An analysis in the MDI Adopting Release showed that the new round lot definition caused a quote to be 

displayed that improved on the current round lot quote 26.6% of the time for stocks with prices between 

$250.01 and $1,000, and 47.7% of the time for stocks with prices between $1,000.01 and $10,000. See 

MDI Adopting Release, 86 FR at 18743. 



250 

 

against a narrower NBBO. In addition, the Commission anticipated that the NBBO midpoint in 

stocks priced higher than $250 could be different under the MDI Rules than it otherwise would 

be, resulting in changes in the estimates for statistics calculated using the 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 NBBO resulting 

from the rule will be higher than the current NBBO midpoint.478 More broadly, the Commission 

anticipated that the adopted rules will have these effects whenever the new round lot bids do not 

exactly balance the new round lot offers. However the Commission stated that it does not know 

to what extent or direction such odd-lot imbalances in higher priced stocks currently exist, so it is 

uncertain of the extent or direction of the change.479 

The Commission also anticipated that the MDI Rules could result in a smaller number of 

shares at the NBBO for most stocks in higher-priced round lot tiers.480 To the extent that this 

occurs, there could be an increase in the frequency with which marketable orders must “walk the 

book” (i.e., consume available depth beyond the best quotes) to execute. This would affect 

statistics that are calculated using consolidated depth information, such as measures meant to 

capture information about whether orders received an execution of more than the displayed size 

at the quote, i.e., “size improvement.” 

                                                
478  For example, if the NBB is $260 and the national best offer is $260.10, the NBBO midpoint is $260.05. 

Under the adopted rules a 40 share buy quotation at $260.02 will increase the NBBO midpoint to $260.06. 

Using this new midpoint, effective spread calculations will be lower for buy orders but higher for sell 

orders. 

479  See MDI Adopting Release, 86 FR at 18750. 

480  However, this effect will depend on how market participants adjust their order submissions. See MDI 

Adopting Release, 86 FR at 18746, for further discussion. 



251 

 

The MDI Rules may also result in a higher number of odd-lot trades, as the inclusion of 

odd-lot quotes that may be priced better than the current NBBO in consolidated market data may 

attract more trading interest from market participants that previously did not have access to this 

information.481 However, the magnitude of this effect depends on the extent market participants 

who rely solely on SIP data and lack information on odd-lot quotes choose to receive the odd-lot 

information and would have traded frequently against odd-lot quotes had they known about 

them. The Commission states in the MDI Adopting Release that it believes it is not possible to 

observe this willingness to trade with existing market data.482 

The MDI Rules may have implications for broker-dealers’ order routing practices. For 

those market participants that rely solely on SIP data for their routing decisions and that choose 

to receive the expanded set of consolidated market data, the Commission anticipated that the 

additional information contained in consolidated market data will allow them to make more 

informed order routing decisions. This in turn would help facilitate best execution, which would 

reduce transaction costs and increase execution quality.483 

The MDI Rules may also result in differences in the baseline competitive standing among 

different trading venues, for several reasons. First, for stocks with prices greater than $250, the 

Commission anticipated that the new definition of round lots may affect order flows as market 

participants who rely on consolidated data will be aware of quotes at better prices that are 

currently in odd-lot sizes, and these may not be on the same trading venues as the one that has 

                                                
481  See MDI Adopting Release, 86 FR at 18754. 

482  See id. 

483  See MDI Adopting Release, 86 FR at 18725. 



252 

 

the best 100 share quote.484 Similarly, it anticipated that adding information on odd-lot quotes 

priced at or better than the NBBO to expanded core data may cause changes to order flow as 

market participants take advantage of newly visible quotes.485 However, the Commission stated 

that it was uncertain about the magnitude of both of these effects.486 To the extent that it occurs, 

a change in the flow of orders across trading venues may result in differences in the competitive 

baseline in the market for trading services.  

Second, exchanges and ATSs have a number of order types that are based on the national 

best bid and offer, and so the Commission anticipated that the changes in the NBBO caused by 

the new round lot definitions may affect how these order types perform and could also affect 

other orders with which they interact.487 The Commission stated that these interactions may 

affect relative order execution quality among different trading platforms, which may in turn 

affect the competitive standing among different trading venues, with trading venues that 

experience an improvement/decline in execution quality attracting/losing order flow.488 

However, the Commission stated that it was uncertain of the magnitude of these effects.489 

Third, the Commission anticipated that, as the NBBO narrows for securities in the 

smaller round lot tiers, it may become more difficult for the retail execution business of 

wholesalers to provide price improvement and other execution quality metrics at levels similar to 

those provided under a 100 share round lot definition.490 To the extent that wholesalers are held 

                                                
484  See MDI Adopting Release, 86 FR at 18744. 

485  See MDI Adopting Release, 86 FR at 18754. 

486  See MDI Adopting Release, 86 FR at 18745, 18754. 

487  See MDI Adopting Release, 86 FR at 18748. 

488  See id. 

489  See id. 

490  See MDI Adopting Release, 86 FR at 18747. 



253 

 

to the same price improvement standards by retail brokers in a narrower spread environment, the 

wholesalers’ profits from execution of individual investor orders might decline,491 and to make 

up for lower revenue per order filled in a narrower spread environment, wholesalers may respond 

by changing how they conduct their business in a way that may affect retail brokers. However, 

the Commission stated that is was uncertain as to how wholesalers may respond to the change in 

the round lot definition, and, in turn, how retail brokers may respond to those changes, and so 

was uncertain as to the extent of these effects.492 To the extent that this occurs, this may impact 

wholesalers’ competitive standing in terms of the execution quality offered particularly to 

individual investor orders. Where implementation of the above-described MDI Rules may affect 

certain numbers in the baseline, the description of the baseline below notes those effects. 

C. Economic Effects 

The Commission preliminarily believes that the introduction of qualified auctions for 

NMS stocks would increase competition to supply liquidity to marketable orders of individual 

investors. This might enhance order execution quality for individual and institutional investors as 

well as improve price discovery. The magnitude of the improvements in order execution quality 

that individual and institutional investors may experience as a result of this Proposal might be 

less than indicated for a variety of reasons (though it may also be greater), including the 

implementation of MDI Rules, the effect of which is not yet in the data. Under the MDI Rules, 

the availability of faster consolidated market data with more data on odd-lot information, 

auctions information, and depth of book information from competing consolidators could result 

                                                
491  Individual investor orders typically feature lower adverse selection than other types of orders, such as 

institutional orders. See supra section II.D.2 and supra section VII.B.2 for discussion of why it is generally 

more profitable for liquidity providers to execute against orders with lower adverse selection risk.  

492  See MDI Adopting Release, 86 FR at 18748. 



254 

 

in improved execution quality for customer orders were their broker-dealers who currently utilize 

SIP data switch to using the expanded consolidated market data.493 Nevertheless, the 

Commission preliminarily believes that the Proposal would lead to improvements in individual 

and institutional investor order execution quality, as well as improvements in price discovery, 

relative to a baseline in which MDI Rules are implemented. 

The Commission acknowledges considerable uncertainty in the costs and benefits of this 

rule because the Commission cannot predict how different market participants would adjust their 

practices in response to this rule. The Proposal would likely cause wholesalers and some retail 

brokers to incur significant adjustment costs to their operations. It is unknown whether the 

current industry practice of routing nearly all retail order flow to wholesalers would persist were 

the Commission to adopt this rule, because wholesalers might charge for this service and retail 

brokers might find it more profitable to develop their own routing services. On the other hand, 

wholesalers may still find the practice of routing to be profitable were there to remain an 

information advantage, and due to the proposed exception to be able to execute a segmented 

order at a price equal to or better than NBBO midpoint without exposing it in a qualified auction. 

Among the possible effects are a decline in profitability for wholesalers. Some retail 

brokers could also experience costs from wholesalers reducing the amount of PFOF they pay to 

retail brokers or from reducing or charging for the order handling services they offer to retail 

brokers. Some of these costs could ultimately be passed on to individual investors, such as 

through the resumption of commissions for NMS stock trades being charged by some retail 

                                                
493  See supra note 421 for further details on how the MDI Rules adopted in the MDI Adopting Release could 

affect the NBBO. It is unclear how benefits in execution quality will change because of uncertainty 

regarding how the price improvement wholesalers provide to individual investors will change as well as 

uncertainty regarding how the NBBO midpoint will change for stocks with prices above $250 once the 

MDI Rules are implemented. 



255 

 

brokers.494 Market participants would also incur compliance costs, such as exchanges and NMS 

Stock ATSs incurring costs for creating qualified auctions, as well as broker-dealer and trading 

center compliance costs related to establishing policies and procedures for identifying and 

handling segmented orders and originating brokers that submit segmented orders. NMS plans 

and their participants (including the exchanges and FINRA) would incur compliance costs in 

order to update the consolidated market data feeds and to broadcast qualified auction messages. 

FINRA would incur compliance costs to update the ADF and to broadcast qualified auction 

messages. 

As discussed above, this section measures the economic effects of the proposed 

amendments relative to a regulatory baseline that includes the implementation of the MDI 

Rules.495 Furthermore, this section reflects the Commission’s assessment of the anticipated 

economic effects of the proposed amendments, including potentially countervailing or 

confounding economic effects from the MDI Rules.496 However, given that the MDI Rules have 

not yet been implemented, they likely have not affected market practice and therefore data that 

would be required for a comprehensive quantitative analysis of the economic effects that 

includes the effects of the MDI Rules are not available. It is possible that the economic effects 

relative to the baseline could be different once the MDI Rules are implemented. Where 

implementation of the above-described MDI Rules may affect certain numbers, the description 

of the economic effects below notes those effects.  

                                                
494  See infra section VII.C.2.b.ii for a discussion of the possibility of the return of commission fees. 

495  See supra section VII.B.7. 

496  See supra section VII.B.7 for a discussion of the Commission’s anticipated economic effects of the MDI 

Rules as stated in the MDI Adopting Release. 



256 

 

 

 

The Commission believes that the Proposal would increase competition among market 

participants to provide liquidity to marketable orders of individual investors.497 The majority of 

individual investors’ marketable orders are currently internalized by wholesalers without 

competition at the order-by-order level.498 The Commission believes that, by introducing an 

auction mechanism that allows market participants to bid for individual investor orders that 

would otherwise be internalized by wholesalers, Proposed Rule 615 and the proposed 

amendments to Rule 600 would facilitate competition to provide liquidity to individual investors 

by drawing additional liquidity from market participants other than the wholesalers that handle 

the majority of individual investor orders.499 Marketable orders internalized by wholesalers 

feature lower price impacts, i.e., have lower adverse selection risk.500 Thus, the lower adverse 

selection risk of the order flow that would be routed to qualified auctions would incentivize 

market participants to trade against this flow via auction participation, as market participants 

                                                
497  The Proposal would also increase competition among market participants to supply liquidity to beyond-the-

midpoint non-marketable limit orders of individual investors because these orders could not be executed at 

restricted competition trading centers at prices beyond the midpoint unless they met one of the other 

exceptions to Proposed Rule 615. However, as shown below in Table 20, the majority of beyond-the-
midpoint non-marketable limit orders are not internalized. Additionally, Table 20 also shows that the 

executed volume of beyond-the-midpoint non-marketable limit orders submitted by individual investors 

and routed to wholesalers is significantly smaller than the volume of marketable limit orders. Therefore, an 

increase in competition to supply liquidity to these orders may be more limited than for the marketable 

orders of individual investors. The Commission does not believe that the Proposal would have a significant 

effect on the competition to execute the fractional share portions of individual investor orders that may 

qualify for the exception in Proposed Rule 615(b)(5). 

498  See supra note 454. 

499  Although the Proposal is predicted to improve execution quality for individual investors, it is likely that 

profits for some market participants would be reduced, including some wholesalers and some retail brokers. 

See infra sections VII.C.2.c and VII.C.2.d for a discussion of these potential costs. Potential costs to other 

market participants are discussed elsewhere in infra section VII.C.2. 

500  See supra section VII.B.2.b. 



257 

 

would find providing liquidity against this order flow more attractive relative to the LOB or to 

individual investor orders with greater adverse selection that may currently be routed to 

exchanges.  

The Commission is mindful of the limitations faced by investors who lack access to 

algorithmic trading technologies, e.g., individual investors and professional traders relying on 

displayed screens, to determine when to provide liquidity in qualified auctions. The proposed 

100-millisecond minimum auction length would be too short for such investors to be able to 

participate in these auctions unless they have to access algorithmic trading technology.501 

Additionally, the Proposal would prohibit exchange RLPs (unless they operated via one of the 

exceptions to qualified auctions), which would further constrain the ability of these market 

participants to compete to supply liquidity to segmented orders by limiting their ability to quote 

at sub-penny increments.502 However, the Commission believes that market participants with 

access to algorithmic trading technology, including SORs used for trading institutional orders, 

would be able to participate in qualified auctions and thereby enhance the competition to provide 

liquidity to individual investors.  

Competition to supply liquidity through qualified auctions would further be enhanced by 

the proposed implementation of a 5 mil (i.e., $0.0005) per share auction fee and rebate cap for 

                                                
501  The possibility of adverse price movement (“adverse fade” probability) during an auction is discussed in 

infra section VII.C.2.b.  

502  Consequently, these market participants could only compete to provide liquidity to segmented orders via 

exchange LOBs or ATSs. However, quoting on exchanges and ATSs can only take place at 1-cent price 

increments and the quoted midpoint. Therefore, if these participants wanted to provide a more competitive 

price relative to qualified auctions, they would be required to quote at the next better full-penny price or at 

the midpoint (for a tick-constrained stock). In contrast, participants of qualified auctions would be able to 

compete by providing liquidity at prices that are only 0.1 cents better than the existing auction price. As 

such, under qualified auctions, competition to provide liquidity to segmented order flow at better prices 
would be incrementally more costly for investors who lack access to smart order routers, placing these 

participants at a disadvantage relative to participants with access to smart order routers. 



258 

 

executed auction responses and a 5 mil per share rebate cap for segmented orders priced at $1.00 

per share or greater.503  

First, the Commission believes that the proposed auction fee and rebate caps would help 

ensure that exchanges and ATSs have sufficient incentives to operate qualified auctions. Using 

information from the financial statements of the three major exchange groups which collectively 

account for the overwhelming majority of trading volume on exchanges, the Commission 

estimates that the average total net capture504 for exchanges is currently around 4 mils for all 

trading types.505 However, the Commission understands based on Staff conversations with 

industry members that the net capture for the executions of orders during continuous trading 

hours (but not open or close auctions) priced at $1.00 per share or greater is likely close to 2 

mils. The Commission expects that in response to the 5 mil auction fee and rebate cap for 

executed auction responses priced at $1.00 per share or greater, open competition trading could 

charge fees of around 5 mils to executed auction responses and provide rebates of approximately 

3 mils to broker-dealer submitting the segmented order to the qualified auction, and thus 

maintain a net capture of approximately 2 mils for these transactions. For the executions of 

                                                
503  Qualified auction fee and rebate caps would be limited to 0.05% of the auction response price per share for 

executed auction responses and segmented orders priced at less than $1.00 per share in Proposed Rule 

615(c)(4). Additionally, the Proposal would require that qualified auction fees and rebates be the same for 

all of its auction participants, i.e., volume-based tiering, which tends to advantage large liquidity suppliers 

who transact in sufficient volumes to trigger lower fees and/or higher rebates, would not apply to qualified 

auction fees and rebates. Under the proposed rule, no fee could be charged for submission or execution of a 

segmented order, or for submission of an auction response. See supra section IV.C.4. 

504  Net capture refers to the difference between average fees levied and rebates paid. 

505  Intercontinental Exchange, the parent firm of NYSE, reports on page 51 of its 2021 10k filing that its net 
capture for U.S. equity transactions was approximately 4.2 mils in 2021. Nasdaq did not report its net 

capture in their 10K filing, however Nasdaq provides information on their investor relations webpage 

which, when we average the relevant 2021 volumes, indicates that the average net capture across all 

Nasdaq platforms for U.S. equity transactions was 5.9 mils (see Nasdaq 2022/2021 Monthly Volumes, 

available at https://ir.nasdaq.com/static-files/465d2157-c476-4546-a9f7-8d7ad0c9be77). Cboe reports in 

their 2021 Form 10-K filing that their net capture for U.S. equity transactions was approximately 2 mils.  

https://ir.nasdaq.com/static-files/465d2157-c476-4546-a9f7-8d7ad0c9be77


259 

 

orders priced below $1.00 per share on exchange LOBs, the Commission estimates that 

exchanges have an average net capture of around 0.28% of the transaction value;506 thus, for 

these orders under $1.00, the net capture may be lower than what they earn on exchange LOB 

transactions. However, qualified auction hosts may be able to compensate for this decline, e.g., 

by reducing rebates for segmented orders priced at $1.00 per share or greater to 1 mil or 

otherwise cross-subsidizing segmented orders priced below $1.00 per share with access fees 

charged on their LOB, with the overall goal to at least maintain their overall total net capture of 

around 2 mils for trading on their exchange.507 

Second, the proposed 5 mil auction fee and rebate cap for executed auction responses 

priced at $1.00 per share or greater would likely result in qualified auction fees and rebates that 

would be unlikely to have a significant impact on the price improvement auction bidders would 

be able to offer because the 5 mil fee and rebate cap is smaller than the minimum pricing 

increment in qualified auctions. Since larger fees limit the ability of liquidity suppliers to offer 

better prices, setting a lower auction fee cap could result in improved execution quality for the 

segmented order. Furthermore, the auction rebate cap of 5 mils for segmented orders is likely to 

limit the competitive bidding advantage of the broker-dealer submitting the segmented order to 

the qualified auction. The maximum rebate of 5 mils is smaller than the minimum pricing 

                                                
506  The estimate for the 0.28% net capture, which is the difference between fees received and rebates paid out 

by the exchange, is obtained by an analysis of current fee and rebate schedules based on Rule 19b-4 filings 

with the Commission for each of the equity exchanges operating in the United States as of June 1, 2022, as 

well as a review of the transaction prices that each exchange posts. This amount is because, for transactions 

under $1.00 per share, most exchanges set their baseline fee at 0.30% but do not offer baseline rebates, and 

some charge fees to both sides of the transaction leading to more than 0.30% per trade earned by the 

exchange. 

507  The assumption that the exchanges earn an average 2 mil spread on trading behavior is discussed above in 

this section. The Commission believes that it is reasonable to assume that the exchanges would fund 
qualified auction rebates through access fees, either from qualified auctions or the continuous order book. 

The Commission believes that it is reasonable to assume that the exchanges overall would try to continue to 

earn approximately 2 mils per transaction under the Proposal, but the Commission acknowledges that there 

is some uncertainty regarding this assumption and seeks public comment. 



260 

 

increment in the auction, which limits the ability of the broker-dealer submitting the segmented 

order to use the rebate to subsidize the price improvement they offer in their qualified auction 

bids. 

Third, the Commission believes that the caps on qualified auction fees and rebates would 

incentivize open competition trading centers to compete more on the basis of execution quality, 

rather than fees and rebates, in order to attract segmented orders. The 5 mil rebate cap for 

segmented orders priced at $1.00 per share or greater would result in rebates that are 

significantly lower than the rebates that are currently offered by most exchanges in these stocks. 

Academic literature has shown that the presence of high liquidity fees and rebates on some 

market centers may impact broker-dealer routing decisions based on where they can receive the 

highest rebate (or pay the lowest fee), rather than where they can receive better execution quality 

on behalf of their customers.508 In contrast, with the 5 mil rebate cap, the effect of rebates on 

qualified auction participants for stocks with prices greater than $1.00 may be sufficiently small 

as to have a minimal impact on overall market structure or behavior.509 This would limit the 

degree to which open competition trading centers could use rebates to attract segmented orders to 

their qualified auctions and help incentivize them to compete more on the basis of the execution 

quality of their auctions.  

 In addition, the Commission believes that proposed minimum price increments under 

Proposed Rule 615(c)(3)510 would further enhance competition to supply liquidity to marketable 

                                                
508  See, e.g., Robert H. Battalio, Shane A. Corwin & Robert Jennings, Can Brokers Have It All? On the 

Relation Between Make-Take Fees and Limit Order Execution Quality, 71 J. Fin. 2193 (2016). 

509  All but two exchanges do not offer a rebate for transactions priced below $1.00 per share. Thus, for these 

transactions, the proposed auction fee and rebate cap for executed auction responses would likely not result 

in lower rebates. 

510  Under proposed Rule 615(c)(3), segmented orders and auction responses must be priced in an increment of 

no less than $0.001 (or 0.1 cent) if their prices are $1.00 or more per share, in an increment of no less than261 

 

individual investor orders through qualified auctions, as smaller price increments are likely to 

encourage greater amounts of price improvement. However, lowering the price increment 

beyond that proposed may increase the possibility of market participants seeking to gain 

execution priority by pricing their auction responses in economically small increments. Thus, the 

size of the proposed price increment that has been chosen for qualified auctions is intended to 

increase price improvement while still reducing the likelihood of participants using economically 

insignificant price increments. 

 

The Proposal likely would reduce transaction costs for individual investors due to 

improved competition to supply liquidity to individual investor orders.511 By making marketable 

order flow from individual investors that is currently internalized by wholesalers and executed at 

prices less favorable than midpoint accessible to other market participants in qualified auctions, 

the Proposal would allow additional market participants an opportunity to compete to directly 

trade with these individual investor orders.512 The Commission estimates that the potential 

benefit to individual investors from this increased competition, the competitive shortfall rate, 

would range between an average of 0.86 bps to 1.31 bps for marketable orders that met the 

definition of a segmented order.513 Based on Commission estimates that between 7.3% to 10.1% 

                                                
$0.0001 (or 0.01 cent) if their prices are less than $1.00 per share, or at the midpoint of the NBBO. See 

supra section IV.C.3. 

511  See supra section VII.C.1.a for discussion of improvements in competition to supply liquidity to segmented 

orders in qualified auctions. 

512  See infra section VII.C.1.c for discussions of how the Proposal could also enhance the order execution 

quality of other market participants that would be able to compete to supply liquidity to individual investor 

orders, including institutional investors.  

513  As discussed in supra section VII.B.7, the Commission believes that the implementation of qualified 

auctions would lead to improvements in execution quality relative to a baseline in which the MDI Rules are 

implemented, i.e., over and above any improvements in execution quality that may result from the 

implementation of the MDI Rules. Once implemented, the changes to the current arrangements for 



262 

 

of total executed dollar volume would be segmented orders that would be eligible to be included 

in qualified auctions, the Commission preliminarily estimates that this could potentially result in 

a total average annual savings in individual investor transaction costs, i.e., a total competitive 

shortfall, ranging between $1.12 billion to $2.35 billion dollars.514 The Commission 

acknowledges that there is considerable uncertainty in these estimates.515 Additionally, these 

estimates account only for potential changes in individual order transaction costs and assumes 

that the PFOF wholesalers currently pay to retail brokers would be converted into additional 

price improvement for the individual investor order. Furthermore, the estimates do not account 

for the potential return of commission fees charged by retail brokers.516 As discussed in further 

detail below,517 the Commissioner does not believe that retail brokers will respond to the loss of 

                                                
consolidated market data in the MDI Adopting Release may impact the magnitude of the benefit from the 

proposal for individual investors, but the effects are uncertain. Trading costs are measured against the 

NBBO midpoint and, as discussed in supra note 421, there is uncertainty regarding how the NBBO 

midpoint will change for stocks priced above $250 when the MDI Rules are implemented. It is also 

uncertain how or to what degree changes in trading costs would differ between trades executed at 

exchanges and wholesalers. Since the benefit is measured based on the differences in exchange and 

wholesaler realized spreads, if both realized spread measures changed similarly, then there would not be 

changes in relative differences between their reported spread measures and the estimated benefit would not 

change. 

514  See infra Table 19. The Commission preliminarily believes that, in order for a wholesaler to effectively 
compete against other bidders in qualified auctions, the wholesaler would have to reduce the PFOF it is 

paying to the retail broker in order to bid more aggressively to potentially win the qualified auction. This 

would result in the reduction in PFOF instead going to the customer as additional price improvement, 

which would be reflected in the competitive shortfall calculation. The competitive shortfall estimates do not 

include costs that may arise in the form of potential increases in (or the return of) commissions retail 

brokers charge to individual investors or other reductions in the services that retail brokers currently offer, 

both of which may occur if the Proposal reduces the PFOF paid to retail brokers or results in wholesalers 

charging retail brokers for their order handling services. See infra section VII.C.2.b for a discussion of 

costs to individual investors and infra section VII.C.2.d for a discussion of costs to retail brokers. 

515  The Commission is uncertain about these estimates because the Commission does not know with certainty 

how different market participants would adjust their practices in response to this rule. There is also 

uncertainty in these estimates because of limitations in using the realized spreads to measure the trading 

profits earned by liquidity suppliers. See supra note 426 for additional discussions on the limitations of 

realized spreads.  

516  Most retail brokers have continued to charge commission fees for (human) broker-assisted orders, 

including those that dropped online trade commission fees. 

517  See infra section VII.C.2.b.ii. 



263 

 

PFOF revenue by resuming commission fees, but even in the event that total PFOF revenue 

disappears ($940 million, based on Q1 2022 data)518 and PFOF brokers charge commission fees 

to fully replace this revenue, this cost increase to traders would still be less than the estimated 

$1.12 billion to $2.35 billion annual gain in price improvement estimated by the Commission.  

As shown by analyses in Table 6, Table 7 and Table 8, the realized spreads earned from 

supplying liquidity to individual investor marketable orders routed to wholesalers are greater 

than realized spreads for comparable marketable order transactions (e.g., similar stocks and order 

sizes) on exchanges, indicating that the additional price improvement that these individual 

investor orders receive does not fully offset the lower adverse selection risk associated with these 

orders.519 The Commission estimates the competitive shortfall rate, i.e., the potential additional 

price improvement (and reduction in transaction costs) that the marketable orders of individual 

investors would receive from having their order being exposed to greater competition among 

liquidity suppliers in qualified auctions, as the difference in the realized spreads between 

marketable orders executed on exchanges and individual investor marketable orders that were 

executed after being routed to wholesalers,520 after adjusting for exchange rebates that are 

                                                
518  However, all PFOF revenue might not disappear because wholesalers may continue to pay PFOF for non-

marketable limit orders, which may not be affected by the Proposal and may be based on exchange rebates 

that wholesalers pass through to retail brokers (see supra note 395). The annualized PFOF revenue from 

non-marketable limit orders is estimated to be approximately $275 million, based on Q1 2022 data. See 

supra note 465 for additional information on PFOF revenue in Q1 2022. 

519  See supra sections VII.B.4 and VII.B.5 for discussions of the differences in realized spreads between 

individual investor marketable orders routed to wholesalers compared to marketable orders routed to 

exchanges. 

520  This included marketable orders that the wholesalers internalized and also marketable orders that were 

routed to wholesalers and then executed on a riskless principal or rerouted to another venue and executed 

on an agency basis. The Commission does not adjust wholesaler realized spreads for the PFOF they pay to 

retail brokers because PFOF, while a cost to wholesalers, is not a cost to investors. See supra note 514 for 

further discussions on the assumed effects of PFOF for purposes of this analysis.  



264 

 

currently paid to liquidity suppliers on exchanges, as well as for fees (5 mils) that would 

potentially be charged to liquidity suppliers in qualified auctions.521  

To illustrate the logic behind this calculation, it is useful to go through the following 

thought experiment. Pick a stock, a day, and a range of order size that is executed by 

wholesalers. Based on Rule 605 data or CAT data, one can calculate the transaction costs that 

retail investors incur for this stock, on this day, and for this range of order size. The question is: 

what would be the transaction costs for those orders if they were sent to competitive auctions? 

Although such auctions as those being proposed here do not exist, the marginal profit required to 

incentivize provision of liquidity on exchanges’ order books can serve as a proxy. This marginal 

profit to liquidity provision can be estimated as the on-exchange realized spread (for a given 

stock, on a given day, and within a given range of order size) plus the estimated rebate that 

exchanges pay the liquidity providers. The estimated transaction cost for the auction equals the 

estimated marginal profit of liquidity providers on exchange order books plus the maximum 5 

mil fee (a lower fee would result in a higher competitive shortfall). The competitive shortfall is 

the difference between the current transaction cost of retail investors off-exchange wholesalers 

and the estimated transaction cost in the auction. Equivalently, one can view this as the 

difference in marginal profits to liquidity provision on and off-exchange (where spreads are 

adjusted by the auction fee rather than by PFOF). 

Competitive shortfall rates are calculated using three different estimates of exchange 

rebates. The first Rebate Base method is calculated based on Commission estimates of average 

                                                
521  The realized spreads after adjusting for potential exchange rebates to liquidity suppliers are estimated and 

discussed in supra section VII.B.4. In estimating the competitive shortfall rate we also deduct a 5 mil fee 

from the exchange adjusted realized spreads to account for the potential fees charged to liquidity suppliers 

in qualified auctions. The Commission acknowledges that realized spreads are a proxy for the trading 

profits earned by liquidity suppliers. See supra note 426 for further discussion on the limitations of realized 

spreads. 



265 

 

exchange rebates paid to liquidity suppliers on maker-taker exchanges (i.e., exchanges that pay a 

rebate to orders supplying liquidity and charge a fee for orders demanding liquidity) and fees 

charged to liquidity suppliers on inverted exchanges (i.e., exchanges that charge a fee for orders 

supplying liquidity and pay a rebate for orders demanding liquidity) and flat fee exchanges (i.e., 

exchange that don’t pay rebates, but may charge fees for orders both demanding and supplying 

liquidity).522 The other two methods, which are calculated to see how the competitive shortfall 

rates vary based on differences in estimates of exchange fees and rebates, are calculated by 

varying the exchange fees and rebates estimated in the Rebate Base method by 25%. The Rebate 

High method estimates higher rebates and lower fees for supplying liquidity and assumes 

exchange rebates on maker-taker venues are 25% greater than in the Rebate Base method and 

exchange fees on inverted and flat fee exchanges are 25% lower than in the Rebate Base 

method.523 The Rebate Low method estimates lower rebates and higher fees for supplying 

liquidity and assumes exchange rebates on maker-taker venues are 25% lower than in the Rebate 

Base method and exchange fees on inverted and flat fee exchanges are 25% higher than in the 

Rebate Base method.524 

                                                
522  The estimated exchange rebates for orders supplying liquidity used to calculate the competitive shortfall 

exchange base method are the same as those used to calculate the Realized Spread Rebate differential in 

supra Table 6. See supra note 435 for a discussion of how these estimates of exchange rebates were 

determined. A 5 mil fee is then further deducted to account for the potential fee charged to liquidity 

suppliers in qualified auctions. 

523  The Rebate High method is calculated assuming that exchange rebates to liquidity suppliers on maker-taker 

exchanges are 34 mils; that exchange fees for supplying liquidity on inverted exchanges are 11 mils; and 

that exchange fees for supplying liquidity on flat fee exchanges are 5 mils. A 5 mil fee is then further 

deducted to account for the potential fee charged to liquidity suppliers in qualified auctions. 

524  The Rebate Low method assumes that rebates on maker-taker exchanges are 25% lower and fees on 

inverted and flat fee exchanges are 25% higher. For our adjustments we assume: exchange rebates to 

liquidity suppliers on maker-taker exchanges are 20 mils; exchange fees for supplying liquidity on inverted 

exchanges are 19 mils; exchange fees for supplying liquidity on flat fee exchanges are 9 mils. A 5 mil fee is 

then further deducted to account for the potential fee charged to liquidity suppliers in qualified auctions. 



266 

 

The estimates of the overall average competitive shortfall rates and the competitive 

shortfall rates for different types of NMS stocks are presented below in Table 18.525 This analysis 

incorporates the contrasting levels of adverse selection risk (price impact) and price 

improvement provided to orders internalized by wholesalers and executed on exchanges. 

Ultimately, the increased price improvement of wholesalers does not match the lower price 

impact of individual investor orders, causing wholesaler realized spreads to exceed exchange 

realized spreads, and competitive shortfall rates to be positive. In order to ensure robustness of 

the results and to account for potential limitations of the coverage of Rule 605 reports,526 the 

analysis estimates competitive shortfall rates using data from Rule 605 reports, as well as data 

from CAT. All CAT and Rule 605 estimates of the competitive shortfall rates are positive in all 

three methods, which indicates that the realized spreads earned by wholesalers on the marketable 

orders of individual investors tend to be higher than realized spreads earned by liquidity 

suppliers on exchanges after adjusting for exchange rebates. However, the average competitive 

shortfall rates calculated using data from Rule 605 reports tend to be lower than those estimated 

from CAT data. Rule 605 estimated competitive shortfall rates using the Rebate Base, Low, and 

High methods are 0.58 bps, 0.77 bps, and 0.38 bps, respectively, while CAT estimated 

competitive shortfall rates using the Rebate Base, Low, and High methods are 1.08 bps, 0.86 bps, 

and 1.31 bps, respectively. The differences appear to be mainly driven by differences between 

the exchange realized spreads calculated using Rule 605 and CAT data. Exchange realized 

                                                
525  Competitive shortfalls are calculated using the same methodology for calculating realized spreads that is 

described in Table 6 and Table 7, but the amount for exchange rebates adjustments may be different 

depending on the rebate method used. Additionally, the competitive shortfall deducts a 5 mil fee from the 

exchange adjusted realized spreads to account for the potential fees charged to liquidity suppliers in 

qualified auctions, which is not included in the realized spread differential calculations. 

526  See supra section VII.B.4 discussing limitations of Rule 605 coverage. 



267 

 

spreads calculated using CAT data tend to be lower than those calculated using Rule 605 data, 

with CAT data estimating an average exchange realized spread of -1.22 bps for all stocks and 

Rule 605 data estimating an average exchange realized spread of -0.67 bps. This difference could 

be driven by the CAT data having broader coverage of marketable orders than Rule 605 data.527 

The analysis in Table 7 supports this by showing that sample from CAT data contains over $16 

trillion in trading volume from marketable orders routed to exchanges in Q1 2022, while Table 6 

shows that the sample from Rule 605 data is smaller, containing over $9 trillion in trading 

volume from marketable orders routed to exchanges.528 Given the broader coverage of the CAT 

exchange data, the Commission believes that the estimates derived from sample from the CAT 

data provide a more complete estimate of the realized spreads for marketable orders executed on 

exchanges than the sample from the Rule 605 data. Therefore, the Commission believes that the 

range of the estimated competitive shortfall rate from the CAT data, 0.86 bps to 1.31 bps may be 

a more representative measurement of the realized spread difference between individual investor 

marketable orders executed by wholesaler and marketable orders executed on exchanges.529 

The estimates in Table 18 indicate that the competitive shortfall rate appears to be higher 

in non-S&P 500 stocks than in S&P 500 stocks and ETFs, with non-S&P 500 competitive 

                                                
527  The different time horizons used for the calculation of the realized spreads could also contribute to the 

observed difference in realized spreads between the samples, with the CAT sample calculating realized 

spreads at the one minute horizon and Rule 605 data calculating spreads at the 5 minute horizon. However, 

Conrad and Wahal (2020) examined realized spreads at different horizons and found that realized spreads 

measured at the 5 minute horizon tended to be lower than realized spreads measured at the 1 minute 

horizon, which indicates that the different time horizons may not be a significant driver of the difference in 

realized spreads between the two samples. 

528  Note that the samples in Table 6 and Table 7 are filtered to be limited to orders under $200,000 in value. 

However, the trading volume for the CAT sample is still larger than the exchange trading volume for the 

unfiltered sample from Rule 605 data shown in Table 5. 

529  The Commission acknowledges that there is uncertainty in these estimates. See supra note 515 for 

additional discussions.  



268 

 

shortfall rates of 3.07 bps under the Rebate Base method computed using CAT data, compared to 

the competitive shortfall rates of 0.44 bps and 0.34 bps for S&P 500 stocks and ETFs 

respectively. These results are consistent with the results shown in Table 8, which indicate that 

the differences in realized spreads between individual investor marketable orders executed at 

wholesalers and marketable orders executed at exchanges are larger in less liquid stocks.530 

Additionally, the estimates in Table 18 indicate that exchanges’ rebates tend to have a larger 

effect on the competitive shortfall rate for non-S&P 500 stocks, with these types of stocks 

showing the greatest variation in the competitive shortfall rates estimated by the Rebate Low and 

Rebate High methods. 

Table 18: Competitive Shortfall Rates Estimates 

Data 

Source 
Stock Type All S&P 500 Non-S&P 500 ETF 

Rule 605 WH Realized Spread (bps) 0.72 0.30 1.55 0.64 

Rule 605 EX Realized Spread (bps) -0.67 -0.30 -1.97 -0.12 

Rule 605 EX Realized Spread Adj Rebate Base (bps) -0.001 -0.05 -0.24 0.28 

Rule 605 EX Realized Spread Adj Rebate High (bps) 0.19 0.02 0.25 0.41 

Rule 605 EX Realized Spread Adj Rebate Low (bps) -0.20 -0.12 -0.73 0.15 

CAT WH Realized Spread (bps) 0.85 0.42 2.00 0.51 

CAT EX Realized Spread (bps) -1.22 -0.28 -3.90 -0.34 

CAT EX Realized Spread Adj Rebate Base (bps) -0.40 -0.06 -1.54 0.08 

CAT EX Realized Spread Adj Rebate High (bps) -0.18 0.00 -0.90 0.20 

CAT EX Realized Spread Adj Rebate Low (bps) -0.63 -0.12 -2.19 -0.05 

Rule 605 Competitive Shortfall Rebate Base (bps) 0.58 0.30 1.42 0.26 

Rule 605 Competitive Shortfall Rebate High (bps) 0.38 0.23 0.93 0.13 

Rule 605 Competitive Shortfall Rebate Low (bps) 0.77 0.37 1.91 0.38 

CAT Competitive Shortfall Rebate Base (bps) 1.08 0.44 3.07 0.34 

CAT Competitive Shortfall Rebate High (bps) 0.86 0.38 2.42 0.22 

CAT Competitive Shortfall Rebate Low (bps) 1.31 0.50 3.71 0.46 

This table shows estimates of competitive shortfall rates, wholesaler realized spreads, and exchange realized 

spreads after adjusting for exchange rebates. Competitive shortfall is estimated by subtracting realized spreads 

on marketable orders routed to exchanges after adjusting for exchange rebates and fees for liquidity suppliers 

in qualified auctions from realized spreads on marketable orders routed to wholesalers. Estimates are 

calculated using three different competitive shortfall estimation methods to account for exchange rebates: (1) 

Competitive Shortfall Rebate Base (“Base”) method (see supra note 522); (2) Competitive Shortfall Rebate 

                                                
530  See supra section VII.B.4 for a discussion of the analysis in Table 8. 



269 

 

High (“High”) method (see supra note 523); and (3) Competitive Shortfall Rebate Low (“Low”) method (see 

supra note 524).  

The competitive shortfall estimates are calculated separately for samples from Rule 605 data and CAT data 

and are derived from the execution quality stats for marketable orders under $200,000 described in detail in 

Table 6 (Rule 605 data) and Table 7 (CAT data). For the sample from Rule 605 data, the difference in dollar 

realized spread measures between exchanges and wholesalers are estimated by subtracting the average rebate 

adjusted exchange realized spread (using estimated exchange rebate rates from one of the competitive shortfall 

rebate method estimates) and also deducted a 5 mil fee (to account for the potential fee charged to liquidity 

suppliers in qualified auctions) from the adjusted wholesaler average realized spread at the stock-month-order 

size category level for the combined market and marketable limit order types with average order size category 

dollar values less than $200,000 (average order dollar values were determined for each order-size category 
stock-month by dividing the total number of covered shares in the order size category by the total number of 

covered orders and then multiplying by the stock-month’s average VWAP), calculated from Rule 605 reports. 

The share weighted averages of the wholesaler and exchange realized spread differences are then determined 

at the individual stock-month level by share-weighting across different order-size categories based on the 

number of shares executed (at the market center + away) in wholesalers’ Rule 605 reports in that order-size 

category. Percentage realized spread differences are then calculated by dividing the dollar realized spread 

differentials by the stock-months VWAP as estimated by TAQ. The weighted average of the individual stock-

month percentage realized spread differentials are averaged together based on weighting by the total 

wholesaler dollar trading volume in that stock-month for the combined marketable order type (wholesaler 

dollar trading volume is estimated by multiplying the Rule 605 report wholesaler total executed share volume, 

i.e., the share volume executed at market center + share volume executed away from the market center, for the 
stock-month-order type by the stock’s monthly VWAP). A similar methodology was used to calculate the 

CAT competitive shortfall measures, but the share weighted volume estimates were calculated up to the 

individual stock-week-order-size level and then these values were aggregated together based on a weighted 

average using the total wholesaler dollar trade volume executed in that category. The realized spread measures 

reported are the average wholesaler and exchange adjusted rebates (adjusting for the exchange rebates 

reported under this method but not including the 5 mil fee deduction for the qualified auction fees) used to 

compute the competitive shortfall rates. 

Table 18 estimates the average annual total competitive shortfall (i.e., the average total 

annual estimated dollar value of improvements in individual investor transaction costs) by 

multiplying the competitive shortfall rate by an estimate of the total annual dollar volume of 

segmented orders that could potentially participate in qualified auctions. Because the 

Commission is uncertain about the volume of orders that would participate in qualified auctions, 

the analysis uses three different scenarios to estimate the dollar volume of individual investor 

orders that may participate in qualified auctions.531 Under the Base segmented order volume 

                                                
531  The percentage multipliers used in these volume estimates were estimated from an analysis of CAT data in 

Jan. 2022. The analysis found that wholesalers trading in an off-exchange principal capacity against orders 

originating from an FDID Individual customer account type accounted for 12.36% of the total consolidated 

dollar volume reported by the SIP during the month. Of these individual orders, 36.78% of the executed 



270 

 

scenario, the Commission analysis assumes that all individual investor orders under $200,000 

would be exposed in qualified auctions, which is estimated to constitute 7.8% of total executed 

dollar volume.532 Under the Low segmented order volume scenario, the Commission analysis 

assumes that only individual investor marketable orders under $200,000 would be exposed in 

qualified auctions, which is estimated to constitute 7.3% of total executed dollar volume.533 

Because some broker-dealers may submit segmented orders over $200,000 to qualified auctions 

if it would result in the order receiving better price improvement,534 under the High segmented 

order volume scenario, the Commission analysis assumes that 50% of individual investor orders 

over $200,000 would also be exposed in qualified auctions, which is estimated to constitute 

10.1% of total executed dollar volume.535 These scenarios include orders executed by 

wholesalers at prices at or better than NBBO midpoint, though should these orders continue to 

                                                
dollar volume originated from orders with dollar values of $200,000 or greater. Of the remaining orders, 

5.90% of the executed dollar volume belonged to orders that were not market or marketable limit orders.  

532  The Base Scenario estimate of 7.80% as the percentage of total dollar volume that could potentially be 

segmented orders that could be exposed in qualified auctions is estimated by multiplying the 12.36% of 

total executed dollar volume belonging to individual accounts and executed by wholesalers in a principal 

capacity by the 63.22% (1-36.78%) of this executed dollar volume from orders that were less than 

$200,000.  

533  The Low Scenario estimate of 7.34% as the percentage of total dollar volume that could potentially be 

segmented orders that could be exposed in qualified auctions is estimated by multiplying the 12.36% of 

total executed dollar volume belonging to individual accounts and executed by wholesalers in a principal 
capacity by the 63.22% (1-36.78%) of this executed dollar volume from orders that were less than 

$200,000. This was then multiplied by 94.1% (1-5.9%) to account for the assumption that only market and 

marketable limit orders would be submitted to qualified auctions.  

534  Proposed Rule 615 would create an exception in which segmented orders with a dollar value of $200,000 

or greater may be executed at a restricted competition trading center without being exposed in a qualified 

auction. However, the exception still allows these orders to be submitted to qualified auctions.  

535  The High Scenario estimate of 10.08% as the percentage of total dollar volume that could potentially be 

segmented orders that could be exposed in qualified auctions is estimated by multiplying the 12.36% of 

total executed dollar volume belonging to individual accounts and executed by wholesalers in a principal 

capacity by 81.61% (1-36.78%/2), which is the percentage of the remaining executed dollar volume of 

orders originating from individual investor that are less than $200,000 plus 50% of the executed dollar 
volume of individual orders that were $200,000 or greater, which would be submitted to qualified auctions 

under this scenario. 



271 

 

receive this execution via the exception to the rule then they would not be sent to qualified 

auctions. This is appropriate given that these orders are also included in the analysis examining 

the execution quality of individual investor marketable orders routed to wholesalers.536 

Therefore, removing these orders from the analysis would serve to increase the realized spread 

for wholesalers and thus increase the competitive shortfall for the remaining percentage of total 

executed dollar volume.  

Table 19 estimates the average annual total competitive shortfall under the three 

segmented order volume scenarios for each of the three different competitive shortfall rebate 

methods. The table presents estimates for both the sample from Rule 605 data and the sample 

from CAT data. The total competitive shortfalls estimated for the Rule 605 sample are smaller 

than those estimated for the CAT sample. The Rule 605 data sample Rebate Base method 

estimates total competitive shortfalls ranging between $800 million and $1.0 billion dollars for 

the Low and High segmented order volume scenarios, respectively, while the CAT data sample 

Rebate Base method estimates total competitive shortfalls ranging between $1.5 billion and $1.9 

billion dollars. As discussed above in this section, given the broader coverage of the CAT 

exchange data, the Commission believes the estimated competitive shortfall rates derived from 

the CAT data are more representative than those derived from Rule 605 data. The total 

competitive shortfall estimated from the CAT data sample using the Rebate High method ranges 

between $1.1 billion and $1.5 billion dollars over the different segmented order volume 

scenarios, while the estimates from the Rebate Low method range between $1.7 billion to $2.3 

billion dollars. Given the uncertainty regarding the estimates of average exchange rebates and the 

                                                
536  Marketable orders that are routed to wholesalers and executed at the NBBO midpoint or a more favorable 

price are included in the analysis in Table 6, Table 7, Table 18, and Table 19, as well as additional analysis 

based on the data used in these table. 



272 

 

volume of segmented orders that would be exposed to qualified auctions, the Commission 

estimates that the average annual total competitive shortfall, i.e., the total annual average 

reduction in individual investor transactions cost, from the Proposal may range between $1.1 

billion dollars and $2.3 billion dollars.537  

Table 19: Total Annual Competitive Shortfall Dollar Values under Different Volume Scenarios 

  Segmented Order Volume Scenario 

Data 

Source Competitive Shortfall 

Scenario 

Base (7.80% of Total 

Executed Dollar 

Volume) 

Low (7.34% of Total 

Executed Dollar 

Volume) 

High (10.08% of 

Total Executed 

Dollar Volume) 

Rule 

605 

Competitive Shortfall 

Rebate Base (0.58 bps) 
$800 million $753 million $1.03 billion 

Rule 

605 

Competitive Shortfall 

Rebate High (0.38 bps) 
$530 million $499 million $684 million 

Rule 

605 

Competitive Shortfall 

Rebate Low (0.77 bps) 
$1.07 billion $1.01 billion $1.38 billion 

CAT Competitive Shortfall 

Rebate Base (1.08 bps) $1.50 billion $1.41 billion $1.94 billion 

CAT Competitive Shortfall 
Rebate High (0.86 bps) $1.20 billion $1.12 billion $1.54 billion 

CAT Competitive Shortfall 

Rebate Low (1.31 bps) $1.82 billion $1.71 billion $2.35 billion 

This table estimates the total annual competitive shortfall dollar amounts by multiplying the competitive 

shortfall rates for the different method in Table 18 by an estimate of the total annual dollar trading volume that 

could be exposed in qualified auctions under three different scenarios: The Base Volume Scenario (discussed in 

supra note 532), the Low Volume Scenario (discussed in supra note 533) and the High Volume Scenario 

(discussed in supra note 535 ). The total annual dollar trading volume that could be exposed in qualified auctions 

under a scenario is estimated by multiplying the scenario’s estimate of the percentage of executed total dollar 

volume by four times the Total Executed Dollar Volume in Q1 2022, which equaled $44.54 trillion. Total 

Competitive Shortfall Dollar Value is estimated by multiplying Competitive Shortfall Rate by the estimate of the 

total annual dollar trading volume that could be exposed in qualified auctions under a scenario.  

 A proposed exception from being required to send individual investor orders to qualified 

auctions under the Proposal is if handling broker-dealers choose to execute individual investor 

orders at prices equal to the NBBO midpoint or better. The analysis in Table 10 presents 

                                                
537  This estimate only accounts for potential changes in individual order transaction costs and assumes the 

PFOF that wholesalers currently pay to retail brokers would be converted into additional price 

improvement for the individual investor order. The competitive shortfall estimates do not include costs that 

may arise in the form of potential increases in (or the return of) commissions retail brokers charge to 

individual investors or other reductions in the services that retail brokers currently offer. See supra note 514 

for additional details.  



273 

 

evidence that wholesalers execute 46% of the shares they internalize at prices equal to or better 

than the midpoint. Analysis of CAT data indicates that there is often additional midpoint 

liquidity available on exchanges and NMS Stock ATSs 

  Table 20 uses CAT data from March 2022 to examine the non-displayed liquidity 

available at the NBBO midpoint on exchanges and NMS Stock ATSs at a moment in time when 

a wholesaler internalizes an individual investor marketable order at a price less favorable (to the 

customer) than the NBBO midpoint.538 The results indicate that, on average,539 51% of the shares 

of individual investor marketable orders internalized by wholesalers are executed at prices less 

favorable than the NBBO midpoint (Wholesaler Pct Exec Shares Worse Than Midpoint). Out of 

these individual investors shares that were executed at prices less favorable than the midpoint, on 

average, 75% of these shares could have hypothetically executed at a better price against the 

                                                
538  More specifically, the analysis uses CAT data to look at the total shares available at the NBBO midpoint 

that originate from hidden midpoint pegged orders on exchanges and NMS Stock ATSs. The analysis 

compares the size of an individual investor marketable order that was internalized in a principal capacity by 

a wholesaler at a price less favorable than the NBBO midpoint (measured at the time the wholesaler 

received the order) to the total shares of midpoint liquidity (originating from midpoint peg orders) at the 

NBBO midpoint on exchanges and NMS Stock ATSs at the time the individual investor order is executed 

in order to hypothetically see how many additional shares could have gotten price improvement if they had 

executed against the hidden liquidity available at the NBBO midpoint. A midpoint peg order is a type of 

hidden order whose price automatically adjusts with the NBBO midpoint. The analysis looks at midpoint 

peg orders on exchanges and ATSs during normal market hours (midpoint peg orders with an Immediate or 
Cancel or Fill or Kill modifier are excluded). The total potential shares in orders that were available at the 

NBBO midpoint from midpoint peg orders on exchanges and ATSs was calculated each stock day by 

adding shares when midpoint peg orders were received by an exchange or ATS and subtracting shares in 

these orders that were canceled or traded. Shares were also subtracted from the total when a wholesaler 

internalized an individual investor marketable order at a price worse than the NBBO midpoint and shares 

were available at the midpoint on exchanges and ATSs that the order could have hypothetically executed 

against. This ensures that that analysis is not overestimating the available midpoint liquidity (i.e., it ensures 

that we do not estimate two individual investor 100 share orders could have executed against the same 

resting 100 share midpoint order). The analysis also kept track of the total amount of dollars of additional 

price improvement that individual investors would have received if their orders had hypothetically executed 

against the liquidity available at the NBBO midpoint instead of being internalized by the wholesaler. Note 
that this analysis might underestimate the total non-displayed liquidity available at the NBBO midpoint 

because it only looks at orders that pegged to the midpoint and not other orders, such as limit orders with a 

limit price equal to the NBBO midpoint. 

539  As discussed in Table 20, percentages were computed at a stock-week level and then averaged across 

stock-weeks by weighting by the total dollar volume the wholesaler internalized during that stock-week.   



274 

 

non-displayed liquidity resting at the NBBO midpoint on exchanges and NMS Stock ATSs. 

Under the current market structure, this liquidity is not displayed, so wholesalers may not have 

been aware of this liquidity and able to execute the individual investor marketable orders against 

it. Currently, if wholesalers wanted to detect this hidden liquidity, they would have had to ping 

each individual exchange or NMS Stock ATS to see if midpoint liquidity was available on that 

venue.540  

 These results shed additional light on the availability of liquidity at the NBBO midpoint 

for a large share of individual investor orders that currently receive executions at less favorable 

prices than the NBBO midpoint and therefore could potentially execute at a price equal to the 

NBBO midpoint under qualified auctions. Under the Proposal, individual investor marketable 

orders submitted to qualified auctions might execute at the NBBO against this hidden liquidity, 

assuming the added transparency does not reduce the supply of midpoint liquidity. The qualified 

auction message would act as a coordination mechanism and would make the broker-dealers that 

handle the orders resting at the NBBO midpoint on exchanges and NMS Stock ATSs aware there 

was a segmented order they could trade against. These broker-dealers could cancel their 

midpoint orders resting on exchanges and NMS Stock ATSs and instead submit them as an 

auction response priced at the midpoint in the qualified auction.541  

Table 20 also estimates the additional dollar price improvement that these individual 

investor marketable orders would have received if they had executed against the available 

midpoint liquidity instead of being internalized. The total amount of additional price 

                                                
540  Pinging for midpoint liquidity at multiple venues could increase the risk of information leakage or that 

prices may move, possibly resulting in some market participants canceling midpoint orders they posted. 

541  If the midpoint liquidity is resting on the LOB of the open competition center running the qualified auction 

then it would be included in the qualified auction without the submitter having to cancel the order. 



275 

 

improvement that all of these individual investor orders would have received was about 51% of 

the total dollar price improvement provided by wholesalers to all of the individual investor 

marketable orders that they internalized (i.e. the marketable orders internalized at prices better or 

equal to the midpoint plus marketable orders internalized at prices worse than the midpoint). 

In addition, the results in Table 20 also indicate the availability of NBBO midpoint 

liquidity is only slightly lower for less liquid (non-S&P 500 stocks) as liquid (S&P500) stocks. 

That is, while about 57% of the shares in individual investor marketable orders in non-S&P500 

stocks internalized by wholesalers received executions at less favorable prices than the NBBO 

midpoint, there was nevertheless hidden liquidity available at the NBBO midpoint for about 68% 

of these non-S&P500 shares. Thus, the potential for NBBO midpoint execution for shares in 

non-S&P500 stocks from qualified auctions is similar to the overall market. Moreover, the 

potential additional price improvement that could have been gained if these individual investor 

orders had executed against this NBBO midpoint liquidity is almost 55% of the total price 

improvement provided by wholesalers in these stocks. In general, the potential for qualified 

auctions under the Proposal to act as a coordination mechanism and potentially create more 

opportunities for hidden liquidity resting at the NBBO midpoint to interact with segmented 

orders exists for both liquid and non-liquid stocks. 

  



276 

 

Table 20: Available Midpoint Liquidity When Wholesaler Internalizes a Retail Trade 

Stock Type Price Group 

Liquidity 

Bucket 

Wholesaler Pct Exec 

Shares Worse Than 

Midpoint 

Pct Shares MP 

Price 

Improvement 

Additional Dollar 

Price Improvement Pct 

All All  51.05% 74.60% 51.05% 

SP500 All  48.41% 72.32% 41.43% 

SP500 1) <$30  64.36% 60.08% 50.00% 

SP500 2) $30-$100  47.82% 60.36% 29.29% 

SP500 3) $100+  47.69% 75.69% 43.27% 

NonSP500 All  57.45% 68.10% 54.51% 

NonSP500 1) <$30 Low 73.30% 49.52% 67.63% 

NonSP500 1) <$30 Medium 71.30% 60.25% 82.85% 

NonSP500 1) <$30 High 66.77% 52.18% 59.74% 

NonSP500 2) $30-$100 Low 63.60% 80.69% 68.88% 

NonSP500 2) $30-$100 Medium 57.71% 85.24% 61.80% 

NonSP500 2) $30-$100 High 50.24% 71.79% 44.58% 

NonSP500 3) $100+ Low 61.62% 84.32% 61.49% 

NonSP500 3) $100+ Medium 55.40% 93.29% 55.96% 

NonSP500 3) $100+ High 47.15% 90.99% 45.57% 

ETF All  49.93% 86.06% 58.28% 

ETF 1) <$30 Low 66.58% 39.75% 31.61% 

ETF 1) <$30 Medium 57.95% 54.91% 38.35% 

ETF 1) <$30 High 62.24% 78.47% 88.70% 

ETF 2) $30-$100 Low 61.01% 62.00% 41.78% 

ETF 2) $30-$100 Medium 53.94% 77.54% 46.85% 

ETF 2) $30-$100 High 49.87% 84.09% 49.56% 

ETF 3) $100+ Low 52.45% 72.28% 40.13% 

ETF 3) $100+ Medium 47.51% 87.20% 45.35% 

ETF 3) $100+ High 46.93% 90.28% 48.33% 

This table summarizes midpoint liquidity available on exchanges and ATSs during March 2022 when a 
wholesaler internalizes an individual investor marketable order less than $200,000 in an NMS common stock or 

ETF on a principal basis at a price less favorable than the NBBO midpoint (at the time of the wholesaler 

receives the order) from one of the 58 retail broker MPIDs in the CAT retail analysis. Stocks are broken out 

into buckets based on their security type, price, and liquidity. Stock type is based on whether a security is an 

ETF, or a common stock in the S&P 500 or Non-S&P 500. Price buckets are based on a stock’s weekly average 

VWAP price as estimated from TAQ.  Stocks within each security type-price bucket, except S&P 500 stocks, 

are sorted into three equal liquidity buckets based on the stock’s total share trading volume during the week 

estimated using TAQ data (see supra Table 9 for additional details on the bucket definitions). See supra Table 7 

for additional details on the sample and CAT analysis of wholesaler executions of the orders of individual 

investors.  

Wholesaler Pct Exec Shares Worse Than Midpoint is the average percentage of individual investor shares that 
wholesalers executed on a principal basis at a price less favorable than the NBBO midpoint (measured at the 

time the wholesaler receives the order). Pct Shares MP Price Improvement is the average percentage of shares 

that the wholesaler executed at a price less favorable than the NBBO midpoint that could have executed at a 

better price against resting liquidity available at the NBBO midpoint on exchanges and NMS Stock ATSs at the 

time the wholesaler executed the order. Additional Dollar Price Improvement Pct is ratio of the total additional 



277 

 

dollars of price improvement of the sample period that individual investors whose orders were executed at a 

price less favorable than midpoint would have received if their orders would have executed against available 

midpoint liquidity, divided by the total dollars in price improvement (measured relative the NBB or NBO at the 

time of order receipt) that wholesalers provided over the sample period when they internalized individual 

investor orders (i.e. the total price improvement for orders wholesalers internalized at prices less favorable than 

the midpoint plus the total price improvement for orders wholesalers internalized at prices more favorable than 

the midpoint). 

Midpoint liquidity is measured based on resting midpoint peg orders on exchanges and NMS Stock ATSs 

during normal market hours identified from CAT data. Midpoint peg orders with an Immediate or Cancel or 

Fill or Kill modifier are excluded. The total potential shares in orders that were available at midpoint on 

exchanges and ATSs at a point in time were calculated keeping a running total each stock day by adding shares 

when midpoint peg orders were received by an exchange or NMS Stock ATS and subtracting shares when 

shares in these midpoint peg orders were canceled or traded. When a wholesaler executes an order at a price 

less favorable than the NBBO midpoint (at the time the wholesaler receives the order), then the executed shares 

are compared to the available resting liquidity at the NBBO midpoint. If the NBBO midpoint at the time the 

order is executed would provide price improvement over the price the wholesaler would have executed the 

order at, then the shares executed by the wholesaler are subtracted from the total resting shares available at the 

NBBO midpoint, up to the lesser of the number of shares executed by the wholesaler or the total resting shares 

available (i.e. the total resting shares will not drop below zero). These are counted as the total shares that would 
have received additional price improvement at the midpoint. This methodology ensures that that analysis is not 

overestimating the available midpoint liquidity (i.e. it ensures that we do not estimate two individual investor 

100 share orders could have executed against the same resting 100 share midpoint order). NBBO midpoints for 

both time of order receipt and time of execution are estimated from the consolidated market data feed. 

The additional dollars of price improvement individual investors whose orders were executed at a price less 

favorable than the midpoint would have received if their orders would have executed against available midpoint 

liquidity was calculated as the difference between the price the wholesaler executed the order at and the NBBO 

midpoint at the time the wholesaler executed the order (i.e., executed price – NBBO midpoint at the time of 

execution for a marketable buy order and midpoint – executed price for a marketable sell order ) times the 

number of shares that would have received the additional price improvement.  

Weighted averages are calculated for the variables Wholesaler Pct Exec Shares Worse Than Midpoint and Pct 
Shares MP Price Improvement using the following methodology. Percentages based on share volume are 

calculate for each stock-week (e.g., total shares executed at a price worse than the midpoint during a stock-

week divided by the total shares of individual investor marketable orders executed by a wholesaler in a 

principal capacity during the stock-week). Weighted averages are then calculated for each stock-type-price-

liquidity bucket by averaging these stock-week percentages over the month by weighting each stock-week by 

the total dollar trade volume internalized by the wholesaler during the stock-week (i.e., using the stock’s total 

dollar trading volume internalized by the wholesaler as the weight when averaging the stock-week percentage 

values).  

The Additional Dollar Price Improvement Pct is not weighted and is calculated as the ratio of the month’s total 

additional dollar price improvement orders executed at a price less favorable than the NBBO would have 

received if their orders would have executed against available midpoint liquidity, divided by the month’s total 
dollars in price improvement (measured relative the NBBO at the time of order receipt) that wholesalers 

provided when they executed individual investor orders (i.e. the total price improvement for orders wholesalers 

internalized at prices less favorable than the midpoint plus the total price improvement for orders wholesalers 

internalized at prices more favorable than the midpoint). 

 



278 

 

 

In addition to benefiting individual investors, the Proposal would improve order 

execution quality for other key market participants that compete to supply liquidity to individual 

investor orders, including institutional investors. For example, individual investor order flow that 

is currently accessed indirectly by institutional investors through wholesaler SDPs could be 

accessed directly at better prices relative to the prices charged by SDPs.542 As stated above, in 

Q1 2022, SDPs associated with the two highest-volume wholesalers accounted for around 3% of 

the consolidated NMS stocks volume, while the volume of shares handled by these two 

wholesalers accounted for 15.9% of consolidated share volume in NMS stocks as of Q1 2022.543 

If institutional and individual investors could directly interact via qualified auctions, then these 

orders could potentially receive better execution quality.544 

 

In addition to increasing price improvement and interaction among market participants, 

the Proposal would improve pre-trade transparency and price efficiency. Currently, because most 

individual investor orders are internalized by wholesalers, pre-trade transparency related to these 

orders is limited, and has very likely declined over time as a result of the increasing share of 

                                                
542  See supra section VII.B.3 for further discussions regarding how institutional investors indirectly interact 

with individual investor orders through wholesaler SDPs. 

543  See supra note 416 and corresponding discussion. 

544  The direct interaction between individual and institutional investors in qualified auctions would allow for 

price improvement for both groups of investors, the sum of which is currently received by the wholesaler 

serving as the intermediary via its SDP. Thus, the gains to individual and institutional investors would be 

an economic transfer from the wholesaler. The impact of the Proposal on the costs to wholesalers is 

discussed in infra section VII.C.2.c. 



279 

 

trading volume that is executed off-exchange.545 Moreover, the fact that some of the same 

market-makers have a large presence both on and off exchange implies a skewed information 

advantage, accruing to a subset of market makers. This subjects on-exchange liquidity providers, 

which may include individual investors, to greater adverse selection, which may have manifested 

in spreads wider than they would be otherwise, as well as lower depth.546  

As a result of the Proposal, price efficiency would be improved as a result of the 

dissemination of qualified auction messages, which would increase transparency regarding the 

trading interest of individual investors. Because qualified auction messages would be included in 

consolidated market data547, they would not only promote competition by soliciting potential 

auction responses from a wide spectrum of market participants, but would also enhance the pre-

trade transparency of marketable orders of individual investors, which may lead to improvements 

in liquidity and price efficiency.548 As market participants would be better able to observe the 

trading interest of individual investors using consolidated market data, this would also allow 

them to better able to observe institutional trades.549 The overall increase in market participants’ 

                                                
545  See supra notes 374 and 375 and accompanying text. Additionally, market participants have stated that 

liquidity displayed at or near the NBBO on exchanges has declined over time. See supra note 376 and 

accompanying text. 

546  See supra section VII.B.1 for further discussion of the increase in off-exchange trading volume. 

547  The MDI Rules required auction messages to be included in consolidated market data. See supra section 

III.B.1. NMS Stock ATSs operating qualified auctions would need to disseminate qualified auction 

messages via FINRA’s ADF. 

548  Evidence shows that increasing pre-trade transparency can improve liquidity and price efficiency. See, e.g., 

Ekkehart Boehmer, Gideon Saar & Lei Yu, Lifting the Veil: An Analysis of Pre-Trade Transparency at the 
NYSE, 60 J. Fin. 783 (2005). However, some evidence suggests that extreme changes, beyond what is 

proposed here, can have detrimental effects on market quality. See Ananth Madhavan, David Porter & 

Daniel Weaver, Should Securities Markets Be Transparent?, 8 J. Fin. Mkt. 265 (2005).  

549  For example, in the most extreme case, if virtually all individual investor orders are routed to and executed 

in qualified auctions, market participants would be able to identify nearly all other off-exchange 

transactions as institutional trades. This may result in additional costs to institutional investors related to 

information leakage; see infra section VII.C.2.f for a detailed discussion. 



280 

 

ability to observe information in trades reported in consolidated market data would lessen the 

highly skewed information advantage of large market makers on and off-exchange, reducing 

adverse selection and potentially improving market quality.550 These improvements would also 

occur should order flow be routed directly to the limit order book rather than going to an auction. 

They would be reduced to the extent that orders would be internalized at midpoint or better by 

wholesalers rather than routed to an exchange. 

Additionally, the execution of more individual investor orders on exchanges would 

increase post-trade transparency because it would be easier to identify which transactions 

belonged to individual investors and on which venue they were executed.551 The effects of post-

trade transparency would be similar in direction to that of pre-trade transparency, though perhaps 

smaller, as the incremental difference in the transparency is less. Overall, the proposal will likely 

lead to increased trading on national market exchanges and on alternative trading systems 

satisfying the specified conditions. Evidence suggests that an increase in trading on lit venues 

could potentially increase information efficiency.552 

 

The Commission recognizes that the Proposal would result in initial and ongoing 

compliance costs, as well as other costs to market participants. The Commission quantifies these 

costs where possible and provides qualitative discussion when quantifying costs is not feasible. 

                                                
550  The advantage would be lessened though not completely eliminated, provided that retail brokers route 

initially through wholesalers rather than directly to exchanges. 

551  Qualified auction messages (which would be disseminated in consolidated market data) could be matched 
with trade execution reports in order to identify which trades belonged to retail orders. Currently, SIP trade 

reports for trades executed on exchanges identify the venue on which the trade occurred. Trade reports for 

trades executed off-exchange do not.  

552  See, e.g., Carole Comerton-Forde & Tālis J.Putniņš, Dark trading and price discovery, 118 J. Fin. Econ. 70 

(2015), who find that high levels of dark trading can impede price discovery.281 

 

 

Market participants would incur various initial and ongoing costs in order to comply with 

Proposed Rule 615. The Commission estimates in Table 21 that total initial PRA compliance 

costs would be approximately $48.28 million while ongoing annual PRA compliance costs 

would be approximately $1.99 million.553 Compliance costs would vary across market 

participants, including broker-dealers, SROs (including national securities exchanges and 

FINRA), and NMS Stock ATSs. 

  

                                                
553  Aggregate PRA compliance costs are calculated by summing up PRA compliance costs of various 

components of Proposed Rule 615, which are detailed below and also discussed in detail above in supra 

section VI.D. 



282 

 

Table 21: Summary of PRA Compliance Costs 

Element Participants 

Implementation 

Costs per Entity 

Ongoing 

Costs per 

Entity 

Total 

Implementation 

Costs 

Total Ongoing 

Costs 

Administer & regulate 

auctions –  

Rule 615 (c)(1) 

10 $79,000 $119,000 $790,000 $1,190,000  

P&P - Identification of 

segmented orders –  

Rule 615 (e)(1), (e)(2) 

157 $34,000 $4,500 $5,301,000  $703,000 

Marking segmented 

orders: In-house – 

Rule 615 (e)(2) 

52 $95,500   $4,970,000   

Marking segmented 

orders: 3rd party – 

Rule 615 (e)(2) 

105 

 

$53,000  

 
 

$5,600,000  

 
 

One-time technology 

project costs to add 

“segmented order” 

and certification 

marks to existing 

marking systems –  

Rule 615 (e)(2), (f)(1) 

182 170,000  30,940,000  

Certification that BD 

identity will not be 

disclosed –  

Rule 615(c)(1)(iii), 

(e)(3) 

 

20 $33,800 $4,500 $675,000 $90,000 

ATS’s excluding 

subscribers –  

Rule 615 (d)(1) 

3 $3,100 $2,700 $9,300 $8,000 

Total 176   $48.29 million $1.99 million 

 

These estimated compliance costs can be disaggregated into several components. First, as 

part of the requirement to provide qualified auction messages, specified in Proposed Rule 615 

(c)(1), national securities exchanges, FINRA and NMS Stock ATSs would have to utilize various 



283 

 

personnel (legal, compliance, information technology, and business operations) to prepare and 

implement a system to collect and provide the information necessary to generate auction 

messages for dissemination in consolidated market data. In addition to the 6 national securities 

exchanges and 3 NMS stock ATSs that the Commission believes would participate in qualified 

auctions,554 FINRA would also disseminate qualified auction data and would therefore incur 

these compliance costs. Thus, each of these 10 entities (6 exchanges, 3 ATSs, and FINRA), 

would each face an estimated initial compliance costs of $79,000, with total cost calculated at 

$790,000.555 Furthermore, each of these entities would have to collect and provide auction 

messages on an ongoing basis, which the Commission estimates would be $119,000 per entity 

annually, totaling $1.19 million (see Table 21 above.)556 

Originating broker-dealers would face various compliance costs, including identifying 

and marking segmented orders, as specified in paragraphs (e)(1) and (e)(2) of Proposed Rule 

615. This would involve utilizing in-house and outside counsel to update and review existing 

policies and procedures, as well as an in-house General Counsel and a Chief Compliance Officer 

to review and approve updated policies and procedures. An outside programmer would also be 

needed to modify existing technology and coordinate with the broker-dealer’s compliance 

manager. The Commission estimates that the initial costs to the 157 originating broker-dealers 

would be approximately $34,000 per broker and $5.3 million for the industry.557 In addition, 

these originating brokers would need to provide ongoing annual reviews and update existing 

                                                
554  See supra section IV.B.2 and section VII.C.1.a for further discussion on the incentives for exchanges and 

ATSs to offer qualified auctions. 

555  See supra notes 290 and 296 for a detailed description of these estimated costs. 

556  See supra notes 291-292; 295; 297 for a detailed description of these estimated costs. 

557  See supra notes 301-303 for a detailed description of these estimated costs. 



284 

 

policies, which Commission estimates would cost about $4,500 per broker-dealer and an 

aggregate cost of $703,000.558  

The 157 originating brokers would also incur the cost of adding a “segmented order” and 

certification mark to their existing marking systems, as specified in Rule 615(e)(2). The 

Commission predicts that approximately one third of the 157 originating brokers (i.e., 52 firms) 

would choose to perform the necessary systems modifications to identify and mark segmented 

orders with in-house staff, which would cost an estimated $95,500 per firm and $4.97 million for 

all 52 firms. Commission estimates that two-thirds of the originating brokers (i.e., 105 firms) 

would hire third-party service providers to assist with these system modifications, which is 

predicted to cost $53,000 per broker and $5.6 million for all 105 firms.559  

The Commission also estimates that there would be an initial one-time technology project 

costs for originating brokers to add the “segmented order” and certification marks to the existing 

marking systems of all 157 originating brokers as well as 25 routing brokers (for a total of 182 

brokers-dealers), in order to comply with paragraph (e)(2) of Proposed Rule 615, and the initial 

one-time cost for routing broker-dealers to mark segmented orders to comply with paragraph 

(f)(1) of Proposed Rule 615 and also mark orders to communicate certifications when applicable. 

These costs are estimated to be $170,000 per broker-dealer, for an aggregate total cost of $30.94 

million.560 

The ongoing task of marking segmented orders would not require new resources, but 

instead would utilize broker-dealers’ existing marking systems. Therefore, the ongoing task of 

                                                
558  See supra notes 304-305 for a detailed description of these estimated costs. 

559  See supra notes 312-313 for a detailed description of these estimated costs. 

560  See supra notes 314-315 for a detailed description of these estimated costs. 



285 

 

marking segmented orders would not cause broker-dealers to incur new monetary costs related to 

updating their systems to market orders (and is therefore not reported in Table 21 above).561 

The Commission estimates that 20 originating broker-dealers would certify and not make 

the mandatory identity disclosure, as specified in paragraph (c)(1) of Proposed Rule 615.562 

Obtaining this certification would involve utilizing in-house and outside counsel to update and 

review existing policies and procedures, as well as an in-house General Counsel and a Chief 

Compliance Office to review and approve updated policies and procedures. Outside counsel 

would also be needed to review the updated policies and procedures. These initial compliance 

costs are estimated at $33,800 per broker, totaling $675,000 for all 20 firms.563 

These 20 broker-dealers would also incur ongoing costs to review and update existing 

policies and procedures, estimated at $4,500 per broker-dealer and $90,000 for all 20 firms.564 

The various compliance costs involved in obtaining and maintaining originating broker 

certification (that it has established, maintained, and enforced written policies and procedures 

designed to assure that its identity will not be disclosed), as specified in paragraphs (c)(1)(iii) and 

(e)(3) of Proposed Rule 615, are summarized above in Table 21. It is uncertain how many 

broker-dealers would choose to exercise this option. If fewer or greater than (the Commission’s 

estimate of) 20 firms seek certification to withhold their identity as the originating broker during 

a qualified auction, aggregate compliance costs would be different from those found in Table 21. 

                                                
561  The Commission estimates that around 2.1 billion orders would need to be marked annually, and calculates 

that this would require between approximately 24,000 and 290,000 total hours, based on its estimates of the 

duration of time used to mark each order. See supra notes 316-320 and corresponding discussion. 

562  See supra note 288 and corresponding discussion. 

563  See supra notes 322-326 for a detailed description of these estimated costs. 

564  See supra notes 327-329 for a detailed description of these estimated costs. 



286 

 

NMS Stock ATSs that participate in qualified auctions would incur costs in order to 

comply with the requirements regarding ATS policies and procedures for excluding subscribers, 

as specified in proposed Rule 615(d)(1). Compliance costs would initially involve reviewing 

existing policies and procedures for consistency with the proposed rule, making modifications as 

appropriate, and putting the policies and procedures in writing. These initial costs, which the 

Commission expects would apply to 3 NMS Stock ATSs, are predicted to cost $3,100 per firm, 

and $9,300 for all 3 firms.565 In addition, these ATSs would face the ongoing cost of reviewing 

and updating the relevant existing policies and procedures, estimated at $2,700 per firm and 

$8,000 for all 3 firms (see Table 21 above). Note that these estimated compliance costs are based 

on the Commission’s assumption that at least some ATSs would operate qualified auctions. As 

discussed above, ATSs would have to make significant adjustments to their business models 

(especially with regards to segmenting customer orders and displaying quotes) in order to meet 

the requirements to operate a qualified auction.566 

 It should be emphasized that the estimated compliance costs described above and 

summarized in Table 21 are the Commission’s best estimate for the required technological, 

operational, and legal services resources that would be utilized in the initiation and ongoing 

operation of qualified auctions.  

 

i. Greater Variation in Execution Quality 

The Commission is cognizant of concerns regarding the possibility of a decline in 

execution quality due to the implementation of qualified auctions. This includes the possibility 

                                                
565  See supra notes 334-335 for a detailed description of these estimated costs. 

566  See discussion in supra section VII.C.1.a. 



287 

 

that a qualified auction host could decide not to host an auction for a particular stock.567 

However, if an order fails to execute in one auction, it could be directed quickly to other 

auctions,568 and/or the wholesaler would have the option to internalize the order at the same or 

better price at which it was exposed in the first auction. Although it is also possible that the 

quotes may move against the order during this time and the wholesaler would have to route it to 

an exchange LOB or expose the order in another qualified auction before it could execute. Also, 

wholesalers would have the option to internalize the trade without exposing it in an auction if the 

wholesaler were willing to execute the order at midpoint or better. More generally, however, the 

Commission believes that at least one open competition trading center would be incentivized to 

operate qualified auctions and serve as the qualified auction host for every segmented order in 

order to increase its volume/market share relative to other trading venues, as well as to 

potentially earn revenue from any net capture between the fees and rebates the qualified auction 

might charge.569 

An additional concern is that there could be a general lack of interest from liquidity 

suppliers to participate in a qualified auction. However, in cases where there was insufficient 

competition from liquidity providers, then the majority of individual investor orders could 

simply be internalized by wholesalers, similar to the current market, though perhaps at inferior 

prices compared to what they might have received under the current market structure. Moreover, 

while this occurrence might occur for any individual order, it would be extremely unlikely at the 

                                                
567  Qualified auction hosts would have the discretion to determine for which stocks they would run auctions. 

568  An additional risk is that there could be price slippage when the order is routed to a different qualified 

auction.  

569  See supra notes 503-507 and accompanying discussions for estimates of net capture rates for fees and 

rebates related to qualified auctions. 



288 

 

market level, because marketable order flow of individual investors has lower adverse selection 

risk than order flow routed to exchanges and most liquidity suppliers would profit by trading 

with it if the predicted realized spread was large enough.570 

A related concern regarding the functioning of qualified auctions is the possibility of 

slippage costs. More specifically, there is the potential that the NBBO could change while the 

qualified auction was in process. Since Proposed Rule 615 would require an auction message to 

be disseminated once an individual investor order is brought to a qualified auction, the concern is 

that these messages would trigger a response in quoted prices. 

The Commission performed an empirical analysis to estimate this risk by observing the 

likelihood that that the NBBO spread moves (i.e., the “fading probability”) as the time lag 

increases (in milliseconds) from the internalization of an individual investor order in comparison 

to the fade probability after NBBO quote movements.571 Results from this analysis572 indicate 

                                                
570  The Commission is uncertain how liquidity would be impacted by increased volatility within the context of 

qualified auctions. The risk that individual investors may receive worse prices compared to the current 

market structure may not be significantly elevated because wholesalers could still internalize the trades if 

they cleared the auctions or route them to the LOB for execution. 
571  The Commission’s “fade analysis” estimates the possibility of adverse price movements to individual 

investors. It’s also possible to consider the likelihood of adverse price movements (and the resulting 

increase in trading costs) from the perspective of the bid winner. However, bidders would be much less 

exposed to risk of fade because their connectivity capacities would allow them to cancel bids should they 

expect adverse price movements. Individual investors, however, would have no control over where their 

orders are executed: auction vs. internally. Therefore, the Commission’s focus is on the risk of adverse 

price movements from the perspective of individual investors. 

572  The Commission’s “fade analysis” uses an algorithm from Boehmer et al. (2021) to identify retail trades. A 

recent paper by Barber et al. (2022) finds that the algorithm correctly identifies only 35% of trades as retail. 

However, plausibly a significant fraction of the retail trades unidentified by the algorithm reflects orders 

executed on a risk-less principal basis, i.e., executions that would not be relevant to the order flow targeted 

by the Proposal. In addition, the internalized retail trades missed by the algorithm are likely idiosyncratic 

across buy and sell orders. Therefore, aggregation of the data, which was performed as part of the 

Commission fade analysis, would likely have minimized any directional bias that these errors would have 

otherwise caused. Therefore, empirical results regarding the estimated risk of adverse pricing movements 

are likely to still be consistent despite limitations in identifying retail trades. See Ekkehart Boehmer et al., 

Tracking Retail Activity, 76 J. Fin. 2249 (2021), and Brad M. Barber et al., A (Sub)penny For Your 
Thoughts: Tracking Retail Investor Activity in TAQ (last revised Sept. 30, 2022) (unpublished manuscript), 

available at https://ssrn.com/abstract=4202874 (retrieved from Elsevier database). 

https://ssrn.com/abstract=4202874


289 

 

that the probability of the NBBO quotes adversely moving after the execution of an individual 

investor order range from 1.8% at 25 milliseconds after an internalized trade, to 2.8% at 100 

milliseconds—an increase of 1 percentage point. Extending the duration to 300 milliseconds, the 

maximum time of the auction as proposed, increases the likelihood of adverse fading to 4.6%.573 

Auction announcements would differ from SIP trade messages for trades executed off-

exchange, which could potentially result in different quote movements compared to those 

observed in the analysis. Auction announcements would represent announcements of pre-trade 

interest as opposed to SIP trade messages being announcements of post-trade interest, which 

could lead to different responses by the liquidity suppliers setting the NBBO.574 Additionally, 

auction announcements would disclose more information than SIP messages for off-exchange 

trades, including, among other things, the direction of the segmented order, the venue it was on, 

and, potentially, the identity of the originating broker.575 Disclosure of this information in 

qualified auctions, including the originating broker as mandated by the Proposal (absent a 

certification from the originating broker that its identity not be disclosed), would provide 

potential bidders with more information about an order than is currently provided by the SIP 

trade message, which in turn could lead to increased variation in the adverse fade that could 

follow auction announcements. That is, adverse fade could be reduced when bidders learn that an 

order stems from an originating broker with relatively low adverse selection risk, while 

                                                
573  Moreover, the substantially lower fade probability of less than 5% following internalized investor trades 

relative to the cross-stock fade probability of more than 16% following a given quote update is consistent 

with low adverse selection costs of currently internalized individual investor orders 

574  Although this difference may be limited given the lower adverse selection risk of segmented orders. 

575  The SIP trade message would not reveal what venue the trade took place on, its direction (although it may 

be able to be estimated based on the transaction price), or whether the trade belonged to an individual 

investor vs another market participant (although, similar to this analysis, this information may be inferred 

based on if the trade executed at a sub-penny price).  



290 

 

announcements of orders from retail brokers with higher adverse selection risk could trigger 

greater adverse fade relative to a SIP trade announcement of an identical order. However, despite 

the likely increase in the variation of adverse fade, the average risk of adverse fade under 

qualified auctions may be similar to SIP trade announcements used to generate the estimates 

reported above. Overall, the results of the Commission’s fade analysis suggest that auction 

messages would result in minimal adverse movements in best quotes due to the low adverse 

selection risk of individual investors, but, for the reasons discussed above, there may be greater 

variability in the risk of adverse quote movements. Because auction messages would differ from 

SIP messages, there is uncertainty regarding their overall effects on the risk of adverse quote 

movements. 

Fade analysis only estimates the possibility that adverse price slippage will occur, not the 

magnitude of the adverse fade. Thus, it is not possible to directly compare the potential loss to 

individual investors due to adverse fading with the gains that could stem from qualified auctions, 

which the Commission estimates would range from 0.86 bps to 1.31 bps, or in dollar terms, 0.15 

to 0.47 cents per share.576 However, one way to possibly quantify the potential cost of fading is 

to consider the price impact of an auction that did not result in a bid, which might increase the 

probability that the NBBO would be worse after a 300 millisecond auction by (the fade 

analysis’s estimate of) 4.6%. If we assume the quote moved 1 cent, which the Commission 

believes is the most frequent movement over a short time span, then the (expected value of the) 

potential average higher transaction cost to the order would face could be 1 cent × 4.6% = 0.046 

cents—significantly smaller than the estimated 0.15-0.47 cent per share gain stemming from 

qualified auctions.  

                                                
576  See supra section VII.C.1.b.  



291 

 

A similar analysis could be used to estimate that the adverse fade that would occur during 

the course of a successful auction, which would be a minimum of 100 milliseconds, with the 

current duration of wholesaler internalized executions, which have a median duration of 3.54 

milliseconds. In other words, even successful qualified auctions that result in execution after the 

minimal duration of time will be (100 milliseconds – 3.54 milliseconds) = 96.56 milliseconds 

slower than the median wholesaler execution. If we use the fade probability of 2.8% for 100 

milliseconds, then the (expected value of the) adverse fade cost of a successful auction relative to 

internalization, assuming 1 cent slippage, would be 1 cent x 2.8% = 0.028 cents. This estimated 

cost is significantly below the estimated 0.15-0.47 cent per share gain stemming from qualified 

auctions. However, this calculation relies on the assumption of the minimum length of a 

qualified auction (100 milliseconds) and the median duration of a wholesaler internalized order 

(3.54 milliseconds). This calculation would generate different results if we assumed longer 

auction lengths, which would increase the fade cost of the auction, and longer (or shorter) 

internalization execution times. Given that a number of auctions in the options market have a 

duration of 100 milliseconds,577 the Commission preliminarily believes that a majority of open 

competition trading centers may elect to choose an auction duration of 100 millisecond for their 

qualified auctions. Therefore, a significant share of auctions may be successfully concluded 

within the 100 millisecond minimum auction duration, although some orders could take longer to 

conclude, while other orders would likely fail to have a successful outcome. Overall, the 

Commission believes the Proposal would result in price improvement for individual investors, 

although it is possible that variation in price improvement and overall execution quality might 

increase. 

                                                
577  See supra note 243 for further discussions of the duration of auctions in the options market.  



292 

 

Besides potentially greater volatility stemming from a failed auction, an additional cost 

for some orders may arise to the extent that lower execution quality for some orders currently 

subsidizes better execution quality for others. Table 10 shows that wholesalers execute 13.82% 

of orders at prices superior to midpoint for the investor.578 On average, unless the orders have 

systematically negative price impact, the wholesaler may not be earning a positive marginal 

profit on these executions.579 This could imply they currently subsidize the additional price 

improvement on these trades with marginal profits earned on other executions. To the extent this 

occurs, if wholesalers’ marginal profits decline under the Proposal, then customers could receive 

less price improvement and experience higher transaction costs on trades that are currently 

subsidized. However, on average, the Commission expects that execution quality for individual 

investor orders would likely improve under the Proposal.580 

The Commission recognizes that wholesalers may provide consistency with regard to the 

execution quality that they deliver to individual investor orders.581 There is the concern that the 

Proposal would undermine the wholesaler business model, which in turn could hinder the ability 

of wholesalers to continue to provide consistency in their execution services. The Commission 

believes, however, that while bidders in qualified auctions may not provide as much consistency 

as wholesalers, some orders could receive improved execution quality while others would 

                                                
578  Table 10 indicates that wholesalers executed 46.05% of shares at midpoint or better and 32.23% of shares 

at midpoint. 

579  For these statistics, the NBBO midpoint is measured at the time the wholesaler receives the order, so it is 

possible that quotes may have changed by the time the wholesaler executes the order. Therefore, it is 

possible that wholesalers execute some of these trades at prices worse than the NBBO midpoint at the time 

of execution, in which case the wholesaler could still earn a positive realized spread on these trades even if 

price impact measured against the NBBO midpoint at the time of execution was positive. 

580  See supra section VII.C.1.b. 

581  See discussion in supra section VII.B.2.b. 



293 

 

receive reduced execution quality (relative to wholesalers). Based on the competitive shortfall 

analysis presented in section VII.C.1.b above, the net result would likely be improved execution 

quality, but the standard deviation of this execution quality would likely increase. 

ii. Resumption of Commissions on NMS Stock Orders 

An additional concern is that if the Proposal results in a significant or complete loss of 

PFOF, then retail brokers would be forced to start charging commissions again for online NMS 

stock and ETF trades.582 There are several reasons that retail brokers would be unlikely to 

resume charging commissions for these orders. First, the majority of retail brokers receive 

relatively little or no PFOF, and yet they have nevertheless successfully managed to support 

commission-free trading through their other revenue-generating lines of business.583 In fact, 

several retail brokers, including some that do not accept PFOF, earned record revenues and 

profits after zero-commission trading was initiated.584 While most brokers had already reduced 

                                                
582  Almost all retail brokers continue to charge a commission fee for human broker-assisted orders. 

583  CAT analysis shows that PFOF brokers originated about 80% of the share volume and about 74% of dollar 

volume of individual investor marketable orders that were routed to wholesalers and executed (see Table 

14). The Commission notes that trading revenue for many discount brokers rose to record levels in 2020, 
shortly after these discount brokers dropped commissions to zero. It’s unclear how much of this increase 

was due to individual investors being incentivized by zero commissions and new trading options such as 

fractional share trading, and how much was due to COVID-related factors that made online trading more 

appealing, including a shift towards remote work and a rise in discretionary funds from government 

stimulus. See Maggie Fitzgerald & Kate Rooney, E-brokers Defy Odds by Recording Record Trading 

Revenue While Dropping Commissions to Zero, CNBC (Aug. 20, 2020), available at 

https://www.cnbc.com/2020/08/20/e-brokers-defy-odds-by-recording-record-trading-revenue-while-

dropping-commissions-to-zero.html. It’s also important to note that even brokers that do not accept PFOF 

experienced increased revenue and profits, despite adopting zero commissions. See Kenneth Corbin, 

Fidelity Posts 6th Straight Record Profit, Barrons (Mar. 9, 2022), available at 

https://www.barrons.com/advisor/articles/fidelity-earnings-2021-51646853970. However, the recent 
increase in individual investor trading volume did not result in the loss of order-by-order competition. 

Isolation of individual investor orders by wholesalers preceded the recent rise in trade volume and a 

subsequent decline in trade volume would not remove the rationale for the Proposal because individual 

investor orders will continue to comprise a substantial share of overall trade volume with the potential for 

improved execution quality if order-by-order competition is incorporated into this market.  

584  Id. 

https://www.cnbc.com/2020/08/20/e-brokers-defy-odds-by-recording-record-trading-revenue-while-dropping-commissions-to-zero.html
https://www.cnbc.com/2020/08/20/e-brokers-defy-odds-by-recording-record-trading-revenue-while-dropping-commissions-to-zero.html
https://www.barrons.com/advisor/articles/fidelity-earnings-2021-51646853970


294 

 

commissions to under $10, there was still considerable concern that the zero commissions would 

lower profits. Despite these concerns, industry profit grew in 2020.585 

Moreover, the average PFOF payment that brokers receive on a 100 share order is 10-20 

cents.586 The PFOF for a 1000 share order is less than the commission fees previously charged 

by broker-dealers, which had generally been $5 or more.587 Thus, just as the loss of commission 

fees was not offset by the receipt of PFOF, the loss of PFOF might not necessitate the return of 

commission fees.588  

Additionally, to the extent that rebates paid for the routing of segmented orders to 

qualified auctions are passed through to retail brokers, it could reduce the likelihood that they 

resume charging commissions. The 5 mil cap on rebates that qualified auctions could pay for the 

submission of segmented orders under the Proposal is approximately 40% of the average 

combined PFOF rate paid by wholesalers for marketable orders as estimated in Table 2.589 If 

rebates paid by qualified auction hosts for the submission of segmented orders to the qualified 

                                                
585  Pre-tax income of FINRA-registered broker-dealers rose from $43,943 million (2019) to $77,212 million 

(2020), an increase of 75.7%. This was substantially larger than the 2.7% increase in profits from 2018 to 

2019 ($42,780 million to $43,943 million). See FINRA, 2021 FINRA Industry Snapshot (2021), available 

at https://www.finra.org/sites/default/files/2022-02/21_0078.1_Industry_Snapshot_v10.pdf. However, it is 

possible that this increase in industry profits was transitory because of the spike in individual investor 

trading volume related to COVID. 

586  See analysis in supra Table 17. 

587  The average retail order size has declined since the shift to zero commission trading. See Pankaj K. Jain et 

al., Trading Volume Shares and Market Quality: Pre- and Post-Zero Commissions (last revised Sept. 16, 
2022) (unpublished manuscript), available at https://ssrn.com/abstract=3741470 (retrieved from Elsevier 

database). Assuming a PFOF rate of 20 cents per 100 shares, orders over 2500 shares would have lower per 

share revenue for the retail broker under a $5 fixed commission model than a PFOF model, while orders 

under 2500 shares would have higher per share revenue. 

588  Commission fees were reduced to zero for online NMS stock trades, but not broker-assisted stock trades. 

Therefore, commission revenues have continued to exceed PFOF revenues for most PFOF firms, excluding 

the two PFOF firms that are online brokers and collect no commission revenue. 

589  The 5 mil rebate would not be earned unless the order was routed to a qualified auction.  If the wholesaler 

chose instead to internalize the order at midpoint (and thereby be exempted from the auction), it would not 

earn the 5 mil rebate. 

https://www.finra.org/sites/default/files/2022-02/21_0078.1_Industry_Snapshot_v10.pdf
https://ssrn.com/abstract=3741470


295 

 

auction are passed through to retail brokers (assuming the retail broker does not route the 

segmented order to the qualified auction directly), then it could supplement the revenue they may 

lose from a reduction in PFOF.590 This could reduce the likelihood that retail brokers resume 

charging commissions.  

iii. Other Possible Costs to Investors 

The Commission is aware of other possible increases in trading costs stemming from the 

Proposal that might be experienced by some individual investors. For example, some individual 

investor orders that are currently eligible for RLP programs might not meet the proposed 

definition of segmented orders and might be excluded from the qualified auctions, which could 

reduce the price improvement that they currently receive via wholesalers or RPLs.591 

Furthermore, since the Proposal would require that the identity of the originating retail 

broker be disclosed (unless the originating broker certifies that the identity of the originating 

broker will not be disclosed to any person that potentially could participate in the qualified 

auction or otherwise trade with the segmented order592), orders from retail brokers that do not 

offer this certification and that are perceived to have higher adverse selection costs could end up 

receiving worse execution quality (i.e., less price improvement) than they currently experience, 

                                                
590  Similarly, if a wholesaler routes a segmented order to a qualified auction and receives the rebate for the 

submission of a segmented order, the wholesaler may indirectly pass the rebate from the qualified auction 

through to the retail broker by using the rebate to subsidize PFOF payments it makes to the retail broker. 

See infra section VII.C.2.d.ii for further discussions on retail broker loss of PFOF revenue.  

591  These orders could also be internalized by the wholesaler or executed on an ATS. 

592  Proposed Rule 615 would require the identity of the originating broker to be disclosed unless it received 

certification that it has established, maintained, and enforced written policies and procedures designed to 

assure that its identity will not be disclosed, as specified in proposed Rule 615(e)(3). See supra section 

IV.B.4. The impact of this certification is uncertain. Non-disclosure would likely signal increased adverse 

selection risk of the order to market participants. However, results from supra section VII.B.5.b indicate 

that broker-dealers with higher adverse selection risk receive worse execution quality from wholesalers, so 

it is unclear whether orders stemming from certified broker-dealers will receive inferior execution quality 

relative to wholesaler internalization under the current market structure.  

 



296 

 

but only if wholesalers today do not already price in such risk when interacting with each retail 

broker. Customers of retail brokers that certify they will not disclose their identity could 

potentially receive worse execution quality if non-disclosure signals to market participants that 

the adverse selection risk of the order flow are high relative to orders from other broker-dealers. 

However, results from supra section VII.B.5.b indicate that broker-dealers with higher adverse 

selection risk receive worse execution quality from wholesalers, so it is unclear whether orders 

stemming from certifying broker-dealers would receive inferior execution quality relative to 

wholesaler internalization under the current market structure. 

Currently, wholesalers may choose not to internalize individual investor orders with high 

adverse selection risk but instead pass them on to other market makers, where they might be 

pooled with other individual investor orders. This pooling might cause these orders to receive 

greater price improvement from RLP programs or other hidden liquidity on exchanges or ATSs 

than they would otherwise receive if liquidity suppliers knew the identity of the originating 

broker. It is therefore possible that the Proposal’s requirement to disclose the identity of the 

originating broker (absent a certification from the originating broker that its identity not be 

disclosed) might result in such orders receiving reduced execution quality relative to what they 

currently receive to the extent they are pooled with orders from retail brokers with lower adverse 

selection risk. However, to the extent individual investor orders with high adverse selection risk 

orders are currently rerouted to exchange limit order books, where they may be effectively 

pooled with orders from other market participants with potentially higher adverse selection risk, 

then it is also possible that such orders could receive increased price improvement through 

execution in qualified auctions relative to what they receive in the current market structure. In 

sum, the more wholesalers already price in the adverse selection risk from each retail broker, the 



297 

 

less impactful is the proposed requirement that retail brokers’ identities be disclosed in the 

auction.  

 

The Commission recognizes that the Proposal would significantly impact the wholesaler 

market/business model. Wholesalers would have to compete directly with other liquidity 

providers on an order-by-order basis to provide price improvement to segmented orders in order 

to execute against such individual investor orders in qualified auctions.593 This would likely 

result in wholesalers filling fewer individual investor orders than they do currently and would 

likely pressure wholesalers to provide greater price improvement in order to remain competitive 

in providing liquidity to segmented orders.594 

The Commission recognizes that a wholesaler who exposes an order in a qualified 

auction would still be able to internalize the order if it submits the winning bid in the auction. 

However, because the order would be subject to competition from other liquidity suppliers, 

wholesalers would most likely not submit the winning bids in all of these auctions and thus 

would ultimately internalize a smaller share of order flow than they do now. Additionally, if a 

wholesaler decided to internalize an individual investor order at the midpoint or better, the order 

would not be required to be brought to a qualified auction. However, the E/Q ratios presented in 

Table 9 indicate that, on average, the execution prices of internalized individual investor orders 

are between 30% to 80% worse than the midpoint at the time of order receipt by the wholesaler. 

                                                
593  A wholesaler would not have to compete on an order-by-order basis for an individual investor order if it 

internalized the individual investor order at a price equal to the midpoint or better, pursuant to Proposed 

Rule 615(b)(3). 

594  As specified in section VII.B, the economic baseline against which we measure the economic effects of this 

proposal, including its potential effects on efficiency, competition, and capital formation, includes the 

changes to the current arrangements for consolidated market data in the MDI Rules; but those amendments 

have not been implemented.  



298 

 

As such, the Commission believes that it would be unlikely for wholesalers to internalize all 

segmented order flow priced at the NBBO midpoint or better, although a fraction of segmented 

orders are expected to be internalized at the NBBO midpoint, as they are today. 

Wholesalers could still end up trading with the majority of marketable orders of 

individual investors, although more of these orders might be executed on exchanges. Moreover, 

qualified auctions would provide wholesalers with an opportunity to access individual investor 

orders initially sent by retail brokers to other wholesalers. That is, individual investor orders 

brought by a given wholesaler to a qualified auction could be filled by another wholesaler that 

ends up submitting the winning bid to the qualified auction. More generally, wholesalers could 

have competitive advantages in supplying liquidity in these auctions due to their economies of 

scale and market making expertise. Therefore, while institutional investors would likely take 

advantage of the opportunity to directly access low-cost order flow provided by qualified 

auctions, it is nevertheless possible that wholesalers would still end up frequently winning 

qualified auctions and trading against a significant share of segmented orders. However, 

individual investor order flow might end up being more spread out across wholesalers rather than 

concentrated among two leading firms.595  

The Commission recognizes that retail brokers might consider routing their orders 

directly to a qualified auction instead of through wholesalers, especially if wholesalers 

discontinue offering PFOF.596 Furthermore, retail brokers could also route orders directly to a 

national securities exchange, which could result in access fees but also exchange rebate 

                                                
595  See supra section VII.B.1. 

596  The Proposal would allow retail brokers to route customer orders directly to a qualified auction with a 

specified limit price (such that they would not be bidding on the order). See supra section IV.A. 



299 

 

revenue.597 While the Commission is unable to quantify the net effect of these factors on the 

overall routing decisions of retail brokers, it is likely that the overall share of individual investor 

order flow initially routed to wholesalers would decrease, while the share initially routed to 

exchanges and ATSs operating qualified auctions would increase. 

The predicted decline in wholesaler profit margins from internalization might force 

wholesalers to reduce or cease paying PFOF, which in turn, would remove a key incentive for 

some broker-dealers to route to wholesalers. PFOF brokers route 97-98% of their market orders 

to wholesalers, while non-PFOF brokers route around 71-72% of their market orders to 

wholesalers.598 PFOF brokers could reduce their dependence on wholesalers to usage rates 

similar to non-PFOF brokers if PFOF ceased.  

Furthermore, the decline in wholesaler revenue and profit could cause wholesalers to start 

charging retail brokers for the order handling services that they provide. This could increase 

competition in the market for exchange execution services and cause wholesalers to lose market 

share against other providers of routing and execution services. Alternatively, wholesalers might 

try to preserve their share in order-handling services by continuing to not charge for their routing 

and execution services to retail brokers (and thereby earn lower profit margins), especially if 

handling marketable order flow provides additional benefits, either in the qualified auctions or 

internalized individual investor orders at the midpoint.599 The Commission is unable to quantify 

                                                
597  Broker-dealers would always have the option to direct their orders to open competition trading centers or 

national securities exchanges instead of qualified auctions under the Proposal. Unlike qualified auctions, 

which would have auction fee and rebate caps of 5 mils (for orders valued at $1.00 or greater per share), 

national securities exchanges would continue to be able to charge tiered fees and rebate revenue, consistent 

with the requirements of Section 19(b) and Rule 19b-4. 

598  See analysis in supra Table 4. 

599  Even if wholesalers do not internalize individual investor orders, there might still be informational value 

from handling individual investor order flow. Wholesalers could be incentivized to offer free order routing 

to retail brokers in order to continue receiving this information, which would include the identity of the 



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the likelihood that wholesalers would continue to not directly charge retail brokers to route and 

execute their orders, but believes that it is possible that the majority of wholesalers would still 

not charge retail brokers for order-handling services.  

The Commission also recognizes that a decline in wholesaler market share would not 

only reduce wholesaler profits but might have spillover effects on wholesaler costs. For example, 

a reduction in the volume of individual investor order flow internalized by wholesalers could 

increase wholesaler inventory risk, which in turn could cause wholesalers to reduce the liquidity 

they supply as exchange market makers or to institutional investors via SDPs.  

 

i. Potential Initiation of Order Handling Fees by 

Wholesalers 

Currently, wholesalers do not charge retail brokers for routing and execution services, 

and pay some retail brokers PFOF for the right to provide these services. If the implementation 

of qualified auctions results in a significant loss of wholesaler profits, wholesalers might have to 

begin charging for routing and execution services. If wholesalers begin charging a fee for routing 

services, retail brokers would have to absorb this cost and earn lower profits and/or pass on a 

share of this cost to their customers. Retail brokers could also respond to the initiation of 

                                                
originating broker, the stock being traded and its order size, direction of the trade, and any handling 

instructions that may have been relayed to the broker, as well as the limit price if it’s a limit order. All of 

this information could help the wholesaler assess the direction of the market. In addition, the wholesaler 
could choose to internalize the order at midpoint (an allowable exception to qualified auctions), which 

would provide additional information on the direction of order flow that other market participants would 

not have since there would be no auction message in this case. Besides receiving a possible informational 

advantage of having first look at individual investor orders, wholesalers could also receive rebate revenue 

for submitting the order to a qualified auction as well as SIP revenue, although the Commission expects the 

rebate to be under 5 mils in order to be less than the 5 mil auction fee cap. See supra section IV.C.4 for a 

discussion of fees and rebates. Finally, wholesalers could choose to internalize the order if it was exposed 

in a qualified auction but did not execute.301 

 

wholesalers routing fees by paying the compliance costs necessary to serve as an originating 

broker, or instead pay fees to brokers that are able to route directly to qualified auctions.  

Retail brokers that certify that their identity would not be subject to the proposed 

disclosure requirement would not only face explicit costs for this certification (as discussed in 

supra section VI.B.3) but also would either have to route the order to the qualified auction 

themselves or use a routing service that wouldn’t trade with the orders, as mandated by the 

Proposal. If instead the broker-dealer used a wholesaler to route its order, the wholesaler would 

have to agree not to trade with the order (as mandated by the Proposal). In response to this 

restriction, the wholesaler may offer less PFOF (if it was currently receiving PFOF from the 

wholesaler) or potentially even charge a fee for handling the order.  

ii. Loss of PFOF Revenue  

The Commission recognizes that the implementation of qualified auctions, as mandated 

by the Proposal, could lead to a significant decline or perhaps disappearance of PFOF in the 

markets for NMS stocks. PFOF amounted to $235 million in Q1 2022 but was received almost 

entirely (93.8%) by four firms.600 One concern is that the loss of PFOF would cause PFOF 

brokers, and potentially other discount brokers, to resume charging commissions for online NMS 

stock trades.601 Just as PFOF brokers led discount brokers into zero-commission trading in 2019, 

it is possible they too could lead discount brokers back to charging commissions if they stopped 

receiving PFOF. 

 The Commission is unable to quantify the risk that some discount brokers would resume 

charging commissions on NMS stock and ETF trades, but there are a number of factors that 

                                                
600  See analysis in supra Table 16 and corresponding discussion. 

601  See supra section VII.C.2.b.ii for a discussion. 



302 

 

might make this risk low. First, the majority of PFOF received by retail brokers comes from 

transactions in the options market.602 The Proposal would not have a significant effect on the 

PFOF brokers receive from options transactions because it applies only to transactions in NMS 

stocks.603 Additionally, wholesalers may also continue paying retail brokers for segmented non-

marketable limit orders in NMS stocks, which may not need to be exposed in qualified auctions 

under the Proposal if their limit price is at the midpoint or a more favorable price. Therefore, to 

the extent that retail brokers do rely on PFOF, they might be able to retain the majority of the 

PFOF revenue they currently receive.  

Second, retail brokers might be able to expand existing revenue lines or develop other 

lines of business to compensate for the loss of PFOF revenue from NMS stock transactions. This 

includes the possibility of increasing revenue from margin interest and securities lending, which 

PFOF brokers currently utilize more heavily than the average broker-dealer.604 Moreover, the 

retail broker industry did not experience a drop in profits following the end of commissions.605 

This includes non-PFOF brokers, who did not choose to make up for lost commission revenue by 

charging wholesalers PFOF. The ability to maintain or increase profits stemmed in part from the 

sudden increase in customer accounts, due to, among other factors, increasingly accessible online 

trading platforms and the initiation of fractional share trading.606 Fractional share trading began 

                                                
602  See supra note 586. 

603  There are key differences between the options market and the market for NMS stocks; see supra note 235 

for further discussion. Proposed Rule 615 is designed to achieve policy objectives that are particular to 

mandatory auctions in NMS stocks. 

604  See discussion in supra section VII.B.6.b. 

605  See supra note 505 and corresponding discussion. 

606  After falling during the 2016-2019 period from $229.2 billion to $197.8 billion, the average daily value of 

executions rose in 2020 to $312 billion. See ‘Order Audit Trail System (OATS) Activity – Daily Average 

OATS Events, 2016–2020’, available at https://www.finra.org/sites/default/files/2022-
02/21_0078.1_Industry_Snapshot_v10.pdf. Fractional share trading allows individual investors to trade and 

enter orders for fractional shares of a security, e.g., an individual investor could submit an order to buy 0.2 

https://www.finra.org/sites/default/files/2022-02/21_0078.1_Industry_Snapshot_v10.pdf
https://www.finra.org/sites/default/files/2022-02/21_0078.1_Industry_Snapshot_v10.pdf


303 

 

with a single broker-dealer in late 2019, but has grown dramatically since that time, with an 

increasing number of broker-dealers offering this functionality.607 Thus, just as retail brokers 

adjusted to the loss of commission revenue, they could also adjust to the loss of PFOF revenue. 

Third, to the extent that rebates paid on segmented orders routed to qualified auctions are 

passed through to retail brokers, it could supplement the revenue they may lose from a reduction 

in PFOF.608 The 5 mil cap on rebates that qualified auctions could pay for the submission of 

segmented orders under the Proposal is approximately 40% of the average combined PFOF rate 

paid by wholesalers for marketable orders as estimated in Table 2. 

Furthermore, there is reason to believe that adjustment to the loss of PFOF would be 

much more manageable for the retail broker industry than the loss of commissions from online 

NMS stock and ETF orders. The average PFOF payment that brokers receive on a 100 share 

                                                
shares of a stock. Fractional share orders often arise from retail brokers allowing individual investors to 

submit orders for a fixed dollar value. It is the Commission’s understanding that retail or clearing brokers 

generally trade in a principal capacity against their customers’ fractional share orders and in turn send out 

principal round lot sized orders for execution to manage their inventory risk. 

607  Evidence suggests that this growth is in great part due to the rise in direct individual investor participation 

in equity markets. See, e.g., Zhi Da, Vivian W. Fang & Wenwei Lin, Fractional Trading (last revised May 

6, 2022) (unpublished manuscript), available at https://ssrn.com/abstract=3949697 (retrieved from Elsevier 

database). See also Rick Steves, Fractional Shares Experts Weigh In Amid Exploding Retail Trading 

Volumes, FinanceFeeds (June 7, 2021) available at https://financefeeds.com/fractional-shares-experts-

weigh-in-amid-exploding-retail-trading-volumes/, which shows that trading volume increased substantially 
(in one case, more than 1,400%) for brokers after they introduced the use of fractional shares. Furthermore, 

an analysis using CAT data reveals that more than 46 million fractional share orders were executed in Mar. 

2022, originating from more than 5 million unique accounts. Over 31 million of these orders were for less 

than 1 share, and they originated from more than 3.3 million accounts. The overwhelming majority (92%) 

of fractional share orders were attributed to natural persons, i.e., individual investors. While fractional 

shares orders represented only a small fraction (2.1%) of total executed orders, they represent a much 

higher fraction (15.3%) of executions received by individual investors. 

608  Similarly, if a wholesaler routes a segmented order to a qualified auction and receives the rebate for the 

submission of a segmented order, the wholesaler may indirectly pass the rebate from the qualified auction  

through to the retail broker by using the rebate to subsidize PFOF payments it makes to the retail broker. 

https://ssrn.com/abstract=3949697
https://financefeeds.com/fractional-shares-experts-weigh-in-amid-exploding-retail-trading-volumes/
https://financefeeds.com/fractional-shares-experts-weigh-in-amid-exploding-retail-trading-volumes/


304 

 

order is 10 to 20 cents,609 far less than the commission fees previously charged by broker-

dealers, which had generally been $5 or more.  

While PFOF payments per order are relatively small, the small group of retail brokers (10 

firms) that earn at least 2% of their revenue from PFOF on NMS stocks610 could be pressured to 

develop or increase other revenue lines and/or attract additional customers to make up for the 

loss of PFOF. However, the dependence on PFOF for some of the top recipients of PFOF 

stemming from NMS stock orders has diminished in recent years due to mergers between PFOF-

dependent firms and firms with less reliance on PFOF. This includes the single largest recipient 

of PFOF, which was purchased by a larger (i.e., higher revenue) retail broker firm that had a 

much smaller share of its revenue stemming from PFOF.611 Moreover, the purchasing firm in this 

merger had a much more diversified revenue portfolio, including a large collection of proprietary 

mutual funds and ETFs under management and a banking unit. In addition, the third largest 

recipient of PFOF was purchased in 2020 by a larger, full service broker with no reliance on 

PFOF. These mergers should help insulate leading recipients of PFOF from the financial damage 

that would result from the loss of PFOF due to Proposed Rule 615. 

 

The Commission is mindful that the increase in competition to attract and execute orders 

of individual investors due to the Proposal could significantly impact costs for some exchanges 

                                                
609  See analysis in supra Table 17.  

610  See analysis in supra Table 16. 

611  The largest dollar recipient of PFOF received $101.5 million in PFOF from NMS stocks in Q1 2022, equal 
to 5.7% of its total revenue. The purchasing firm in this merger received $28.9 million in PFOF in NMS 

stocks Q1 2022, equal to 1.5% of its total revenue. 



305 

 

and ATSs.612 These costs would be in addition to the compliance costs estimated in section 

VII.D.2.a., and include the potential loss of market share for some exchanges and ATSs. The 

Commission believes that most marketable orders of individual investors would end up being 

exposed and executed in qualified auctions hosted by exchanges, which would increase the 

overall percentage of individual investor orders executed on exchanges, and decrease the 

percentage internalized by wholesalers. The market share of ATSs is expected to be stable 

because they do not handle significant fractions of marketable individual investor orders and thus 

are not affected by the proposed introduction of qualified auctions. The Commission believes 

that few ATSs would operate qualified auctions, either because it would be difficult for new 

ATSs to meet the requirements to run qualified auctions or because the requirements of operating 

a qualified auction would be incompatible with the business models of most currently operating 

ATSs.613 

An NMS Stock ATS that wanted to run qualified auctions would face numerous 

requirements, including the need to: permit any registered broker-dealer to become a subscriber; 

provide equal access among all subscribers of the NMS Stock ATS and the registered broker-

dealer of the NMS Stock ATS to all services that are related to a qualified auction operated by 

the NMS Stock ATS or to any continuous order book operated by the NMS Stock ATS;614 

display quotes in the ADF (and thus in the consolidated market data feed); and reveal the identity 

                                                
612 Retail brokers may also choose to directly route their orders to qualified auctions, and may therefore 

compete with wholesalers, ATSs, and exchanges in executing retail orders. However, the Commission 

believes that broker-dealers will play a much more minor role in this competition. 

613  Of the 32 NMS Stock ATSs, the Commission estimates that approximately 3 would operate qualified 

auctions. See supra section VI.C.4 for further discussions of the estimates of how many NMS Stock ATSs 

would operate qualified auction. 

614  This would prohibit the ATS from segmenting customer orders outside of qualified auctions (unless the 

orders were executed at midpoint) and require it to charge the same fee to all subscribers (see supra section 

IV.C.4), thereby prohibiting them from charging tiered auction fees or providing tiered rebates. 



306 

 

of the trading venue for trades executed on the ATS and report those trades to the TRF (which 

would report the trades and identity of the trading venue to the consolidated market data feed); 

operate as an automated trading center pursuant to Regulation NMS Rule 603(b) and have an 

average daily share volume of 1.0 percent or more of the aggregate average daily share volume 

for NMS stocks.615 ATSs would have to make significant adjustments to their business models 

(especially with regards to segmenting customer orders and displaying quotes) in order to meet 

these requirements.616 Additionally, new ATSs that could meet the other requirements might find 

it difficult to achieve 1% market share of trading volume in four out of six months without being 

able to concurrently operate a qualified auction. 

 The Commission acknowledges that Proposed Rule 615 might improve the competitive 

position of higher volume exchanges that offer qualified auctions and harm the competitive 

position of lower volume exchanges that do not. Higher volume exchanges that executed 1% or 

more of the average aggregate daily share volume for NMS stocks during 4 of the last 6 months 

would be eligible to run qualified auctions for segmented orders.617 Exchanges that offered 

qualified auctions would have a competitive advantage in attracting marketable individual 

investor order flow because they would be able to segment the individual investor order flow and 

allow liquidity suppliers to trade against this order flow in smaller pricing increments in their 

qualified auctions.618 Lower volume exchanges that do not meet the volume thresholds to run 

                                                
615  See supra section IV.B.2.b. 

616  The Commission estimates that 3 NMS stock ATSs would participate in qualified auctions. See supra 

section VI.C.4. 

617  The Commission estimates that six national securities exchanges would meet the proposed threshold. These 

include one exchange each from the NYSE, NASDAQ, and CBOE groups, as well as MEMX, IEX, and 

MIAX PEARL. 

618  See supra section IV.G for discussions on restrictions on exchanges from operating any separate trading 

mechanism for segmented orders other than qualified auctions. 



307 

 

qualified auctions would not be able to segment individual investor order flow, unless they did so 

under one of the exceptions, such as offering liquidity to individual investor orders only at the 

NBBO midpoint.619 Additionally, exchanges not offering qualified auctions would be unable to 

execute segmented orders at the finer 0.1 pricing increments that would be available in the 

qualified auctions. These factors could all limit the competitiveness of smaller exchanges.  

 There is also the possibility that if a disproportionate share of order flow is routed to one 

or more exchanges offering qualified auctions, these exchanges might become the preferred 

trading location for any given stock. This, in turn, could cause a liquidity externality to develop, 

making these venues the preferred routing destination for all orders.620 Under such 

circumstances, while the consolidation of liquidity on these exchanges might benefit market 

participants in the short run, it may also lead to barriers to entry in the market for trading 

services, as new entrants would have a harder time attracting sufficient liquidity away from 

established liquidity centers.  

 Lower volume exchanges could also be adversely impacted by the fact that under the 

Proposal, exchanges would have to stop offering RLP programs unless the program resulted in 

trades only at the NBBO midpoint, consistent with a proposed exception. This could result in a 

reduction in the trading volume and revenues received by lower-volume exchanges that do not 

meet the threshold to offer qualified auctions.621 

                                                
619  See supra section IV.B.2.a for a discussion of lower-volume exchanges.  

620  A liquidity externality could emerge if orders tended to concentrate in one auction, such that it would 

become the preferred routing destination and attract more orders. Orders in more liquid venues would be 

more likely to execute at better prices, which in turn, would provide such venues with a competitive 

advantage over less liquid venues. 

621  The Commission believes that the mandated auction mechanism largely would remove the need for RLPs 

run by exchanges that would meet the criteria to run qualified auctions. However, exchanges that operate 

RLPs that do not serve as qualified auctions host would be negatively impacted by having their RLP 

services curtailed. Individual or institutional investors, however, should not be significantly adversely 



308 

 

The Commission is unable to quantify the likelihood that one or more exchanges that 

would be unable to offer qualified auctions would cease operating. However, the Commission 

preliminarily believes that this risk of this is low because the majority of individual investor 

marketable orders are not currently routed to exchanges. Therefore, even if they are not eligible 

to run qualified auctions under the Proposal, the reduction in trading volume that these 

exchanges might experience is unlikely to be large enough to require them to exit the market. 

Even if such an exit were to occur, the Commission does not believe this would significantly 

impact competition in the market for trading services because the market is served by multiple 

competitors. Consequently, if one or more lower-volume exchanges were to exit the market, 

demand would likely to be swiftly met by existing competitors. The Commission recognizes that 

lower-volume exchanges might have unique business models that are not currently offered by 

competitors, but believes that a competitor could create similar business models if demand were 

adequate, and if they did not do so, it seems likely new entrants would do so if demand were 

sufficient. 

                                                
impacted by the loss of these RLP services. From the perspective of individual investors, it would be 

unnecessary to execute orders through RLPs because any non-directed retail order would have a chance to 

be exposed to open competition, either because the order would be filled on a riskless principal basis, or 

because the wholesaler who considers internalizing an order would first be required to bring it to a qualified 

auction. From the perspectives of other market participants, e.g., institutional investors, qualified auctions 

would provide a superior means, relative to RLPs, for these participants to directly interact with retail 

orders. This is the case because (1) unlike RLPs, qualified auctions require that characteristics of the order 

are communicated to bidders, including its price, size, and the name of the underlying retail broker; and (2) 

qualified auctions would allow market participants to interact with a substantially larger and more 
persistent pool of segmented retail order flow, relative to that available through RLPs. However the 

Commission acknowledges that the loss of RLP services may adversely impact market participants that 

may currently supply liquidity through existing RLPs but would not be fast enough to submit an auction 

response to a qualified auction message.  



309 

 

 

The Commission recognizes that the Proposal could increase the risk of information 

leakage for institutional investors in at least two ways.  

First, the risk of information leakage may increase for those institutional investors that 

choose to supply liquidity in qualified auctions. Specifically, market participants could use 

auction message information622 to identify the trades in consolidated market data that correspond 

to executions of individual investors orders in qualified auctions, which could allow these market 

participants to back out information about the corresponding institutional bids.623 For example, if 

a market participant observes that a large volume of individual investor buy orders are filled in 

qualified auctions, they could correctly discern that an institutional investor may be providing a 

large sell order. However, in response to this concern, institutional investors could decide to 

route their orders to ATSs and OTC market makers, where information about their orders may be 

better concealed.624 To the extent that concerns over the risk of information leakage prevent 

                                                
622  Proposed Rule 615(c)(1) specifies that an auction message announcing the initiation of a qualified auction 

for a segmented order must be provided for dissemination in consolidated market data, including the 

disclosure that the auction is for a segmented order, the identity of the open competition trading center, 

NMS stock symbol, side (buy or sell), size, limit price, and identity of the originating broker for the 
segmented order (unless they certified that no bidder in the qualified auction knew the identity of the 

originating broker). Note that institutional bids in qualified auctions would not be revealed unless they were 

the winning bid and resulted in an execution. 

623  See, e.g., Liyan Yang & Haoxiang Zhu, Back-Running: Seeking and Hiding Fundamental Information 

About Institutional Order Flows, 33 Rev. Fin. Studies 1484, 1487 (2020) (“…information about retail order 

flows is equivalent to information about institutional order flows, by market clearing.”). 

624  Trades executed off-exchange, including those executed on ATSs and by OTC market makers, are reported 

to Trade Reporting Facilities (TRFs), which are facilities through which members report transactions in 

NMS stocks, as defined in SEC Rule 600(b)(47) of Regulation NMS. See Trade Reporting Facility (TRF), 

FINRA, https://www.finra.org/filing-reporting/trade-reporting-facility-trf. However, as a result of the 

Proposal, it may be easier to identify institutional trades using TRF data; see infra this section for further 
discussion. Furthermore, it may currently be possible to identify institutional trades in TRF data; see infra 

note 627 and corresponding discussion. 

https://www.finra.org/filing-reporting/trade-reporting-facility-trf


310 

 

institutional investors from seeking liquidity through qualified auctions, this could limit the 

benefits of the Proposal.  

Second, as individual investors’ marketable orders would be increasingly routed to and 

executed in qualified auctions under the Proposal, and as these orders would become more easily 

identifiable through the information contained in auction messages as described above, it may 

become increasingly possible to identify information about off-exchange institutional trades in 

TRF data.625 In the most extreme case, if virtually all individual investor orders are routed to and 

executed in qualified auctions, market participants may be able to identify nearly all off-

exchange institutional transactions reported in the TRF data as originating from institutional 

trades.626 In this way, information leakage might increase even for institutional investors that 

choose not to participate in qualified auctions. 

However, it is possible that information on institutional order flow is already discernable 

through multiple means. First, there is evidence that institutional order flow can be inferred by 

first identifying individual investor order flow, which can be estimated using sub-penny trades in 

TRF data.627 In addition, wholesalers already may have the ability to discern institutional order 

flow due to their knowledge of individual investor order flow. Thus, while there is concern over 

                                                
625  See, e.g., Yang & Zhu, supra note 623, for further discussions on the identifying institutional investor 

orders. 

626  For those individual investor orders that would have been internalized by wholesalers and reported as a 

trade to the TRF but are instead executed in qualified auctions, these trades would be reported as trades 

executed on the exchange or ATS operating the qualified auction, rather than reported to the TRF. This 

would reduce the number of individual investor trades reported to the TRF. 

627  See, e.g., Boehmer et al., supra note 572, who use this methodology to identify individual investor activity. 

Specifically, using TRF data, the authors identify transactions as retail buys if the transaction price is 

slightly below the round penny and as retail sells if the transaction price is slightly above the round penny. 
Some institutional trades receive sub-penny price improvement as a result of midpoint trade price ends in a 

half-penny. Thus, trades at or near a half-penny are likely to be from institutions and are not assigned to the 

retail category.  



311 

 

information leakage for institutional order flow, it may be the case that much of this information 

is already identifiable. To the extent that qualified auctions would result in further information 

leakage, the Proposal may result in additional costs for institutional investors.628 However, this 

effect could be balanced by the increased price improvement that institutional traders would 

receive by being able to interact directly with individual investor order flow in qualified 

auctions. 

The Proposal may also result in wholesalers reducing the liquidity they supply to 

institutional investors via SDPs.629 With reduced wholesaler liquidity provision on SDPs, 

institutional investors might have to resort to other sources of liquidity, e.g., exchanges and 

ATSs or supplying liquidity to qualified auctions. An appealing feature of SDPs from an 

institutional investor perspective is the possibility of disclosing intended order size without being 

detected by other market participants competing for the same liquidity. By switching to other 

sources of liquidity, institutions would no longer enjoy this benefit. Hence, these institutions 

might find it more costly to locate liquidity as they need to protect their intended trade sizes to 

minimize price impact of trades.630  

 

There is a possibility that Proposed Rule 615 could cause displayed LOB liquidity to 

decrease. The Commission believes that the Proposal might entice some liquidity provision to be 

                                                
628  For example, in a study of the Swedish equity market, one academic paper found that a one-standard-

deviation increase in the extent to which HFTs trade in the same direction as large institutional orders is 

associated with a $4,480 higher order execution cost for institutional investors. This result led the authors 
to conclude that the detection of large institutional orders is costly for institutional investors. See Vincent 

Van Kervel & Albert J. Menkveld, High-Frequency Trading Around Large Institutional Orders, 74 J. Fin. 

1091 (2019).  

629  See supra section VII.C.2.c. 

630  However, institutional investor costs could also fall when they are able to trade against individual investor 

orders in qualified auctions. See supra section VII.C.1.c. 



312 

 

redirected from exchange LOBs to qualified auctions,631 which could have an adverse impact on 

quoted LOB depth and the NBBO. More specifically, if liquidity is diverted to qualified 

auctions, there is the risk that the NBBO could widen because some market participants might 

reduce the frequency or the size of the orders they submit to the LOB, including orders that set 

the NBBO prices.632 However, there would be trade-offs regarding the execution risk and 

execution price that might limit the incentives to bid in an auction compared to supplying 

liquidity in the LOB. 633 Moreover, the majority of marketable orders of individual investors are 

already segmented from exchanges and thus are not currently reaching exchange LOBs.634 

Therefore, although LOB liquidity may decline under the Proposal, there is the potential that the 

direct effect of qualified auctions on LOB liquidity may not be significant. 

An additional possibility is that if the Proposal results in the elimination of zero-

commission trading, retail trading volume could decline and the overall pool of liquidity could 

shrink due to increased wholesaler inventory risk.635 A lower overall liquidity level might also 

manifest itself in lower displayed liquidity in exchange LOBs. For example, the introduction of 

qualified auctions might induce some (more sophisticated) individual investors to switch from 

                                                
631  The Commission also is proposing to amend rules addressing minimum pricing increments. See Minimum 

Pricing Increments Proposal, supra note 98. The Commission encourages commenters to review that 

proposal to determine whether it might affect their comments on this proposing release. 

632  The submission of smaller orders might also require aggregation of odd-lot orders across more price levels 

to reach a round lot size, which would cause the NBBO to widen. 

633  See infra section VII.C.3.a.iii for further discussion on the trade-offs involved in supplying liquidity to a 

qualified auction vs. submitting an order to an LOB. 

634  See supra section VII.B.2.a for a discussion of estimates that appear to indicate that over 90% of individual 

investor marketable orders are routed to wholesalers and supra section VII.B.2.b for estimates that 
wholesalers internalize 90% of executed dollar volume in individual investor marketable orders that were 

routed to them. 

635  A reduction in retail trading volume as a result of the Proposal may decrease a wholesaler’s ability to 

manage their inventory risk associated with their other trading activities, such as exchange market making 

or supplying liquidity through their SDPs. This may cause wholesalers to reduce the liquidity they supply 

in their other activities.  



313 

 

placing non-marketable limit orders priced at or outside the NBBO to placing (a) marketable 

orders or (b) non-marketable orders priced between the midpoint and the NBO (NBB) for buy 

(sell) orders, which may participate as segmented orders in qualified auctions.636 In this sense, 

the pool of non-marketable resting orders that would be routed to exchanges might shrink, 

potentially reducing the depth at the NBBO.  

 

 

  As discussed in more detail below, the creation of qualified auctions under the Proposal 

would result in most marketable orders of individual investors being exposed in qualified 

auctions on exchanges and ATSs that are eligible to serve as open competition trading centers.637 

The Commission estimates that 6 exchanges and 3 ATSs could operate qualified auctions. 

Exchanges should have strong economic incentives to offer qualified auctions because the lower 

adverse selection risk of marketable order flow of individual investors makes it a valuable 

commodity that would attract trading interest from other market participants and increase the 

                                                
636  A segmented order in a qualified auction could have the benefit of an increased likelihood of execution 

compared to non-marketable limit orders submitted to a LOB because bidders may supply liquidity (and 

potentially earn part of the spread) to orders submitted to a qualified auction. Non-marketable limit orders 

submitted to a LOB would have to wait until an opposite side marketable order arrived to potentially 

execute, which could result in a greater risk of the order not executing. However this increased likelihood 

of execution would come at the cost of earning a spread by using a non-marketable limit order. 

637 Proposed Rule 615 covers only NMS stocks. Qualified auctions would be conducted for “segmented 

orders,” which would be defined in Proposed Rule 600(b)(91) as an order for an NMS stock for an account 

of a natural person, or an account held in legal form on behalf of a natural person or group of related family 
members, and that for such an account, the average daily number of trades executed in NMS stocks must be 

less than 40 in each of the preceding six calendar months. See supra note 194 and corresponding text for a 

discussion of a Commission analysis indicating that during the six-month period (Jan. 1, 2022, to June 30, 

2022), slightly more than 99.9% of individual investor accounts averaged 40 or fewer orders per day that 

resulted in a trade. Moreover, during the same period, 99% of individual customer accounts averaged 1.86 

or fewer orders per day that resulted in a trade; see analysis in infra Table 22. 



314 

 

exchange’s trading volume and the associated revenue it delivers.638 For this reason, it is likely 

that there would always be at least one exchange or ATS operating a qualified auction.639  

Exchanges and ATSs operating qualified auctions would significantly increase 

competition among liquidity suppliers to fill marketable orders of individual investors, since the 

majority of these orders are currently internalized by wholesalers without competition on the 

individual order basis.640 This increase in competition would have a significant effect on the 

business model of wholesalers and might reduce the volume of order flow that they internalize. 

This would affect the competitive dynamics between exchanges, wholesalers and ATSs related 

to how they compete for both individual and institutional order flow and could result in more 

orders being routed to exchanges that run qualified auctions. Additionally, there would be 

competitive implications for how qualified auctions interact with exchange LOBs. Additional 

analysis is provided below regarding the expected impact of the Proposal on competition: i) in 

the market to supply liquidity to individual investor orders, ii) between exchanges, ATSs, and 

wholesalers, and, iii) between exchange LOBs and qualified auctions. 

i. Competition to Supply Liquidity to Individual Investor 

Orders 

                                                
638  See supra section IV.B.2 for further discussion on the incentives for exchanges and ATSs to offer qualified 

auctions. 

639 In cases where no open competition trading center chose to operate a qualified auction for a security, the 

broker-dealer or wholesaler handling the order would have the option to internalize the order. See supra 

section IV.A for further discussion of options for segmented orders that did not receive an execution in a 

qualified auction. However, it’s very likely that at least one exchange or ATS would operate a qualified 

auction for an order. Because of the low adverse selection risk associated with segmented orders, if a single 

exchange or ATS operated a qualified auction, the trading facility would likely attract additional order flow 

to supply liquidity to segmented orders, which would increase its trading volume. This could potentially 
increase the exchange or ATS’s revenue because a portion of SIP revenue is allocated among facilities 

based on trading volume (FINRA also rebates SIP revenue it receives for the TRF back to its members 

based on their trading volume). 

640   See supra section VII.B.2.b for a discussion of wholesaler internalization. 



315 

 

Qualified auctions would enhance competition to provide liquidity to individual investors 

at the individual order level by drawing additional liquidity from other market participants 

besides the wholesaler handling the individual investor order, including other wholesalers that 

could bid in the auctions. Currently, once a wholesaler receives order flow, another wholesaler is 

unable to interact with these orders unless they are rerouted to that other wholesaler. Routing 

these orders to qualified auctions would prevent these orders from being isolated and instead 

allow them to be exposed to other market participants, including other wholesalers, that could 

bid for the right to execute them.  

The lower adverse selection risk of individual investor orders should incentivize other 

liquidity providers to participate in qualified auctions. It is the Commission’s understanding that 

market participants quote significant liquidity at prices superior to the NBBO.641 This liquidity 

primarily includes inside-the-NBBO odd-lot liquidity quoted on exchanges and non-displayed 

liquidity quoted on exchanges and ATSs, originating from various market participants, including 

institutional investors, market makers, and individual investors. In addition, some market 

participants that currently use marketable orders to demand liquidity from intermediaries might 

benefit from participating in qualified auctions, i.e., quote liquidity at prices better than the 

NBBO, to satisfy their liquidity needs. Proposed Rule 615 would provide an opportunity for 

these participants to potentially trade with individual orders with lower adverse selection by 

redirecting their liquidity provision to open qualified auctions or to switching from demanding to 

supplying liquidity through qualified auctions.  

                                                
641  See supra Table 20 and accompanying discussion in supra section VII.C.1.b for estimates of liquidity 

available at the NBBO midpoint on exchanges and NMS Stock ATSs when a wholesaler internalizes a 

trade. 



316 

 

It would also give institutional investors a chance to directly interact with individual 

investor orders with a minimal degree of intermediation. For example, institutional investors 

with pressing liquidity demand typically rely on optimal trade execution algorithms that split 

their trades into child orders, which may demand liquidity, including on SDPs, where they may 

potentially end up paying the full spread.642 The availability of marketable individual investor 

order flow at qualified auctions would likely draw institutional trade execution algorithms to 

supply liquidity in qualified auctions, where they might trade at the quote midpoint or at least 

inside the NBBO. By doing so, institutional orders would be filled without paying the full 

spread. This would not only increase the competition in liquidity provision against individual 

investor orders, but would also reduce institutional trading costs. 

 Some auction features would also enhance competition to supply liquidity to individual 

investor orders. The Proposal would facilitate finer price improvements for inside-NBBO orders 

by allowing a 0.1-cent quoting increment for shares priced at $1.00 or more per share. This 

would enhance competition by improving the ability of market participants to be able to compete 

on price in their auction responses, since they could quote in finer increments than they could on 

exchange or ATS LOBs.643 An additional source of increased competition to supply liquidity 

would stem from the implementation of a 5 mil auction fee and rebate cap for shares priced at 

$1.00 and above and 0.05% for share prices under $1.00. Mandating low, flat fees and rebates in 

qualified auctions should promote a level playing field among all potential market participants 

                                                
642  See supra section VII.B.3 for further discussions on how institutional investors may indirectly interact with 

individual investor orders via trading on SDPs. 

643  See supra section VII.C.1.a for further discussions on how the auction pricing increment could improve 

competition among liquidity suppliers. 



317 

 

that may wish to trade with segmented orders and therefore serve to increase competition among 

liquidity suppliers.644  

 The Commission is uncertain what effect the proposed requirement to give customer 

orders priority if auction responses are at the same price would have overall on the competition 

to supply liquidity to individual investor orders. On the one hand, giving priority to customer 

orders may encourage more customers, including institutional investors, to participate in 

qualified auctions, potentially increasing competition to supply liquidity to segmented orders. On 

the other hand, it could discourage liquidity provision by broker-dealers in qualified auctions, 

potentially decreasing competition to supply liquidity to segmented orders. However, qualified 

auctions overall would still enhance competition among broker-dealers to supply liquidity to 

individual investor marketable orders, because a significant portion of these would be exposed to 

multiple broker-dealers in a qualified auction instead of being execution in isolated at a 

wholesaler. 

The Commission acknowledges that there could be some limitations on the increases in 

competition to supply liquidity to individual investor orders. The Commission recognizes that 

there are some institutional investors that may currently source liquidity from SDPs in order to 

avoid triggering reactions by market participants who would observe institutional trades might 

avoid qualified auctions and instead continue to access liquidity via other methods. Additionally, 

due to the sub-second duration of the auctions mandated by the Proposal, participation would 

require access to algorithmic trading technology, which could prevent some potential providers 

of liquidity from participating in qualified auctions.645 In sum, however, the net effect of 

                                                
644  See id. and supra section IV.C.4 for additional discussions on the auction fee and rebate caps. 

645  See supra section VII.C.1.a for further discussion on the effect of not having access to algorithmic 

technology on qualified auction participation. 



318 

 

qualified auctions would be an increase in competition to supply liquidity to the orders of 

individual investors. 

ii. Competition Among Exchanges, ATSs, and OTC 

Market Makers  

Proposed Rule 615 would increase competition among wholesalers, ATSs, and exchanges 

in attracting and executing order flow of individual investors.646 It is likely that the share of order 

flow currently internalized by wholesalers or executed on ATSs that do not serve as auction 

hosts would decline. Wholesalers receiving order flow from retail brokers could still end up 

internalizing a substantial portion of orders that they route to qualified auctions. However, 

because the orders would be subject to competition from other liquidity suppliers, wholesalers 

would likely win a smaller share of auctions compared to the share of orders that they currently 

internalize, for which they do not face competition at the individual order level. 

The Proposal might improve the competitive position of higher volume exchanges that 

offer qualified auctions and harm the competitive position of lower volume exchanges that do 

not. Higher volume exchanges that execute 1% or more of the average daily share volume for 

NMS stocks during 4 of the last 6 months would be eligible to run qualified auctions for 

segmented orders.647 Exchanges that offered qualified auctions would have a competitive 

advantage in attracting marketable individual investor order flow because they would be able to 

segment this order flow and allow liquidity suppliers to trade against it in smaller pricing 

increments ($0.001) in the qualified auctions that they host compared to the minimum price 

                                                
646 Retail brokers might also choose to directly route their orders to qualified auctions, and might therefore 

compete with wholesalers, ATSs, and exchanges in executing individual investor orders. However, the 

Commission believes that broker-dealers would play a much more minor role in this competition.  

647  The Commission estimates that six national securities exchanges would meet the proposed threshold. These 

include one exchange each from the NYSE, NASDAQ, and CBOE groups, as well as MEMX, IEX and 

MIAX PEARL. 



319 

 

increment on national exchanges ($0.01).648 The Commission is unable to quantify the likelihood 

that one or more exchanges that would be unable to offer qualified auctions would cease 

operating. Even if such an exit were to occur, the Commission does not believe this would 

significantly impact competition in the market for trading services because the market is served 

by multiple competitors.649 

The Proposal would also likely increase competition between exchanges, ATSs, and OTC 

market makers to attract institutional order flow. The requirement to expose segmented orders in 

qualified auctions could improve the competitive position of exchanges and ATSs that run 

qualified auctions relative to most ATSs650 and all OTC market makers, including SDPs, which 

would not be allowed to host auctions. The resulting increase in marketable orders of individual 

investors routed to exchanges and ATSs that operate qualified auctions, relative to other venues, 

would entice institutional investors to seek to supply liquidity to marketable individual investor 

orders through these auctions. 

The Proposal would likely have an adverse impact on the competitive positions of 

wholesaler-affiliated SDPs to attract institutional order flow by reducing the liquidity available 

therein to institutional investors.651 Specifically, the Proposal might lead retail brokers to directly 

                                                
648  Qualified auctions would have a price increment of $0.001 for shares priced at $1.00 or greater and 0.1% 

for shares under $1.00, in contrast to national exchanges, which have a minimum price increment of $0.01. 

649  See supra VII.B.1 for a discussion of the market for trading services in NMS stocks. See also supra section 

VII.C.2.e for additional discussion on the effects of the Proposal on small and large exchanges. 

650  As discussed in supra section VI.C.4, the Commission believes that 3 ATSs would operate a qualified 

auction. 

651 Institutional investors (or the brokers that represent them) would be able to bid in qualified auctions in 

order to directly interact with individual investor orders. This could give the execution of institutional 

orders better terms because institutional investors would not need to compensate the wholesaler for the 
intermediation services provided by their SDPs. As such, some of the institutional interest would migrate 

from its SDPs to qualified auctions due to more competitive pricing in the qualified auctions. Therefore, the 

loss of access to liquidity for institutional investors provided by SDPs would be mitigated by the ability of 



320 

 

route more of their customer orders to exchanges and ATSs operating qualified auctions instead 

of directing their orders to wholesalers.652 In addition, wholesalers receiving orders from retail 

brokers that they then route to qualified auctions could lose a significant share of these auctions 

to other bidders. These effects would hamper the ability of wholesaler-operated SDPs and other 

OTC market makers to manage their inventory risk by internalizing incoming individual investor 

order flow. This might reduce the ability of these wholesalers and other market makers to 

provide liquidity to institutional investors, who might instead rely on other trading venues, 

including qualified auctions, to meet their liquidity needs. The Commission is unable to quantify 

the extent to which institutional order flow would migrate to exchanges or ATSs that run 

qualified auctions.  

The risk of information leakage from institutional investors’ orders participating in 

qualified auctions could also impact competition between exchanges, ATSs and OTC market 

makers. The Commission recognizes that concerns over the risk of information leakage could 

prevent institutional investors from seeking to provide liquidity in qualified auctions.653 One 

possible way that leakage could occur is if a large volume of individual investor buy orders are 

filled consecutively at the midpoint, then market participants might correctly discern that an 

institutional investor is working a large sell order. Because the side and venue of an institutional 

order executed off-exchange would continue not to be revealed in a TRF trade print under 

Proposed Rule 615, ATSs and OTC market makers would remain competitive in terms of their 

                                                
institutional traders to supply liquidity to marketable orders of individual investors in qualified auctions. 

See supra section VII.B.3 for further discussions on institutional investors interactions with SDPs. 

652  See supra section VII.C.1.a. 

653  See supra section VII.C.2.f for additional discussions on how the Proposal could affect information leakage 

of institutional investor orders.321 

 

ability to conceal intended institutional trades.654 Institutional investors would likely weigh the 

trade-off between potentially lower trade costs provided by qualified auctions and the greater 

concealment of their trading intentions provided by off-exchange executions. In cases where the 

latter objective was paramount, institutional investors could decide to avoid routing some of their 

orders to qualified auctions. As such, ATSs and OTC market makers might remain attractive 

trading venues for such institutional orders. 

Overall, however, the increase in marketable order flow on exchanges and ATSs that 

operate qualified auctions, relative to other venues, would entice institutional investors to supply 

liquidity to marketable individual investor orders through these auctions. Due to the enhanced 

competition provided by qualified auctions, it is likely that execution costs of institutional 

investors’ parent orders would be reduced, which in turn, should further the likelihood that 

institutional order flow would be attracted to exchanges and ATSs that operate auctions. The 

execution priorities of Proposed Rule 615 would reinforce this effect. Under paragraph (c)(5)(ii) 

of the proposed rule, if an institutional investor and a wholesaler (broker-dealer) were bidding 

the same price in a qualified auction, the investor would have execution priority. As such, all else 

constant, institutional investors would win qualified auctions when competing with wholesalers. 

This would reduce execution uncertainty from the perspectives of institutional investors who 

would consider bidding in qualified auctions on exchanges, as well as reduce their trading costs 

as a result of direct interactions with individual investor order flow. These collective effects 

                                                
654  Institutional bids in qualified auctions would also have some ability to be concealed, because they would 

not be revealed unless they were the winning bid. If they do have the winning bid, the side, venue, and 

price of the institutional bid would be revealed, which may provide more information leakage than some 

trades on ATSs. 



322 

 

would result in less institutional orders being routed to ATSs and OTC market makers, including 

SDPs. 

The Proposal would also generate competition between qualified auctions that are offered 

on different exchanges and ATSs.655 Open competition trading centers running qualified auctions 

might compete with each other by trying to offer the most price improvement in their auctions.656 

They might also compete with each other through innovations in their auctions protocols in order 

to differentiate themselves and attract more segmented orders and liquidity suppliers. Open 

competition trading centers might also try to compete with each other on the basis of fees or 

rebates they charge in their qualified auctions. However, the Commission believes that this form 

of competition might be limited because of the flat 5 mil auction fee and rebate cap on executed 

auction responses and the flat 5 mil rebate cap on segmented orders submitted to auctions.657 

More specifically, while providers of qualified auctions could compete by charging a fee under 

the 5 mil cap, this discount would provide far less latitude for attracting orders compared to the 

30 mil fee cap on the LOB.658 Furthermore, volume-based rebate and fees, which are utilized by 

many exchanges in their transaction based fee schedules, would not be permitted within qualified 

auctions (but would remain permitted on exchange LOBs). Therefore, the Commission believes 

that competition based on auction fees and rebates would be minimal. 

iii. Competition Between Qualified Auctions and Exchange 

LOBs 

                                                
655  The Commission includes ATSs to the degree that they would offer qualified auctions. See supra section 

VII.C.1.a. 

656  See supra section VII.C.1.a. 

657  See supra section VII.C.1.a for further discussions on the effects of auction fees and rebates. 

658  See 17 CFR 242.610(c). 



323 

 

The Commission believes that the Proposal might entice some liquidity provision from 

exchanges’ LOB to qualified auctions. A core function of the mandated qualified auction 

mechanism under Proposed Rule 615 would be to segment order flow of individual investors, 

leading to a concentration of this order flow in qualified auctions. As a result, some market 

participants might consider redirecting liquidity provision from the LOB to qualified auctions. In 

doing so, market participants would need to consider the following under the Proposal: (1) 

Displayed orders on the LOB would have priority over auction responses if they were listed at 

the same price, and a winning auction response would have priority over hidden orders on the 

LOB; (2) for shares priced $1 or greater, LOB quoting is subject to a 1-cent price increment,659 

while qualified auctions would accept bids using a 0.1-cent price increment, allowing auction 

responses to jump in front of LOB quotes by quoting at sub-penny prices; and (3) broker-dealers 

with knowledge of where a segmented order is to be routed would not be allowed to submit LOB 

orders that could have priority to trade with the segmented order.660 To the extent that market 

participants quoting visible or hidden liquidity on the LOB prefer to trade against the individual 

investor segment of the order flow through qualified auctions, they might provide liquidity to 

auctions rather than quote liquidity on the LOB. 

 The Commission is unable to quantify the magnitude of this potentially redirected 

liquidity from the LOB to qualified auctions. However, the Commission recognizes that there 

would be a trade-off between adverse selection risk (which would be higher on an exchange 

LOB compared to qualified auctions, where individual investor orders would be segmented) and 

execution risk (i.e., the risk of non-execution, which would be higher for auctions). In general, 

                                                
659  See supra note 146. 

660  See Proposed Rule 615(f)(2). 



324 

 

qualified auctions should provide greater price improvement due to their lower adverse selection 

risk. However, redirecting displayed liquidity to qualified auctions might increase the execution 

risk and trading costs associated with the order. There might be less certainty regarding whether 

a bid in a qualified auction would execute because it would be competing against other bids that 

would not be displayed.661 Additionally, bids in qualified auctions would lead to execution only 

if the market participant is willing to trade at worse prices that could lead to winning the auction, 

which may lower the spread that they would earn relative to executing their non-marketable limit 

order on a LOB.662 Thus, the execution risk of submitting a bid in a qualified auction could be 

greater than posting an order at or inside the NBBO on a LOB. However, these risks associated 

with auctions would be somewhat offset by the lower adverse selection risk of trading against a 

segmented order in a qualified auction. Overall, the Commission believes that redirection of 

liquidity from the LOB to qualified auctions would be limited and would not significantly reduce 

execution quality on the LOB.  

In addition, the name-give-up requirement could potentially reduce wholesaler liquidity 

on the LOB if a wholesaler handled a segmented order where the originating broker made the 

certification under proposed Rule 615(c)(1)(iii) that the identity of the originating broker will not 

be disclosed, directly or indirectly, to any person that potentially could participate in the 

qualified auction or otherwise trade with the segmented order. Some retail brokers may seek 

certification to not disclose their identity, which would impose explicit costs on these broker-

dealers (as discussed above in section VI.C.3). In addition, it could curtail wholesaler activity if a 

                                                
661 Bids in qualified auctions would not be displayed. 

662  Additionally, a non-marketable limit order may earn a greater rebate from supplying liquidity on a maker-

taker exchange LOB compared to in a qualified auction, which would have rebate cap of 5 mils on 

executed auction responses. 



325 

 

wholesaler had an order resting on the limit order book and routed a segmented order originating 

from a broker that made the certification under proposed Rule 615(c)(1)(iii) to a qualified 

auction on the same exchange. In this case, the wholesaler would likely have to cancel its resting 

limit order if it wanted to trade against the segmented order in the auction, since the limit order 

book is included in the auctions. Thus, certification could impact wholesaler quoting on 

exchanges.663  

 

Retail brokers choose how to access the market for trading services in NMS stocks in 

order to fill their customers’ orders. Currently, retail brokers primarily access this market via 

wholesaler internalization, although broker-dealers with exchange memberships or ATS 

subscriptions can access the market directly.664 Retail brokers without these memberships or 

subscriptions must route their order to wholesalers or to other brokers that either have direct 

access to exchanges and ATSs, or have the routing resources to deliver orders to market centers. 

The introduction of qualified auctions would likely reduce the profit that wholesalers earn on 

internalizing marketable order flow, which in turn could result in the decision by wholesalers to 

start charging a fee for routing services. This would improve the competitive position of broker-

dealers with routing access to qualified auctions.665 Retail brokers might further choose not to 

route to wholesalers if they want to avoid the requisite identity disclosure requirement. It is likely 

that other routing brokers with access to qualified auctions would compete to receive order flow 

                                                
663  Wholesalers could indirectly pass their costs for this back to the originating brokers if wholesalers charged 

them a fee for handling segmented orders where the originating brokers made the certification under 

proposed Rule 615(c)(1)(iii). 

664  See supra section VII.B.2.a for further discussion of broker-dealer routing and market access. 

665  The Commission estimates that 182 retail brokers (157 originating brokers and 25 routing brokers) would 

be able to route orders to qualified auctions. See supra note 286 and accompanying text. 



326 

 

from retail brokers without this access. The Commission is uncertain of the extent to which 

routing services would shift away from wholesalers towards other routing brokers. However, the 

implementation of qualified auctions could generally be expected to reduce the benefit of 

wholesaler vertical integration and the potential profits they get from internalizing individual 

investor orders.666 

 

 Wholesalers have been able to secure larger profits by accessing and internalizing the 

majority of marketable order flow of individual traders, which carries less adverse selection risk. 

The Proposal would require wholesalers to route this order flow to qualified auctions,667 opening 

these orders to competition with other market participants. This competition could result in the 

wholesaler not winning the auction. In the event that the wholesaler actually wins the auction, it 

is likely that the increased competition would cause the realized spread (i.e., the wholesaler’s 

profit margin) it receives from internalizing these orders to fall. Declining profit margins could 

reduce the financial latitude that wholesalers needed to pay PFOF to retail brokers.668 The 

Commission also recognizes that the decline or disappearance of PFOF would impact retail 

brokers, although this impact would vary widely across brokers, since only some broker-dealers 

receive PFOF, and the amount of PFOF differs across retail brokers that do receive it. In 

                                                
666  See supra section VII.C.3.a.ii for a discussion of how Proposed Rule 615 would increase competition 

among wholesalers, ATSs, and exchanges in attracting and executing order flow of individual investors. 

667  This would be the case unless the wholesaler internalized the order under one of exceptions, such as 
executing it at the midpoint. If the wholesaler chose to internalize individual investor orders at midpoint, 

the marginal profit earned from supplying liquidity, represented by the wholesaler’s realized spread, would 

be reduced. Currently, wholesalers have an average realized spread of 0.72 (see Table 6). Midpoint 

execution, by definition, generates, at best, a zero realized spread, assuming no adverse price impact. While 

the broker-dealer may have other incentives to execute a trade with a negative realized spread, such as 

reducing inventory risk or as part of a hedging strategy, all else equal, a positive realized spread would 

always be preferable. 

668  See supra section VII.B.5.c. 



327 

 

particular, as discussed in Section VII.B.6.a,669 four retail brokers received 94% of all PFOF in 

2021, and PFOF represented only a fraction of these four retail brokers’ total revenues.  

The Commission acknowledges that the implementation of qualified auctions and the 

likely subsequent reduction in PFOF could pose a competitive threat to retail brokers that are 

dependent on PFOF and lack alternate revenue sources to compensate for this loss of revenue.  

If wholesalers reduce PFOF or begin charging a fee for routing services, PFOF retail brokers 

would have to absorb this cost and earn lower profits and/or pass on a share of this cost to their 

customers. This would, in particular, depend upon the competition they face. For instance, if 

PFOF retail brokers earn economic rents, then they could absorb some of these costs, which 

would come out of their profit. If PFOF retail brokers primarily face competition from other 

PFOF retail brokers, then these brokers could pass on the costs to their consumers. That said, to 

the extent that PFOF brokers face competition from non-PFOF brokers, then their ability to pass 

on costs to their customers, such as in the form of higher commissions on stock and ETF trades, 

could be constrained. More specifically, non-PFOF brokers (which would not be harmed by the 

disappearance of PFOF) would be unlikely to resume charging commissions, which would put 

competitive pressure on commission rates that other retail brokers could charge and still retain 

customers. In this context, if the ability of smaller retail brokers to charge commissions is 

constrained by competition, it could increase the competitive advantage of larger retail brokers, 

which could raise the barriers to entry for new brokers and cause some smaller retail brokers to 

exit the market. The Commission is unable to quantify the likelihood one or more retail brokers 

would cease operating.  

                                                
669  See supra Table 16 and corresponding discussion for an analysis of the rate of PFOF across retail brokers. 



328 

 

Another feature of Proposed Rule 615 that could impact competition in the market for 

retail brokers is the option that allows an originating broker to avoid disclosure of its identity by 

certifying that its identity will not be disclosed, directly or indirectly, to any person that 

potentially could participate in the qualified auction or otherwise trade with the segmented order, 

as specified in Proposed Rule 615(c)(1)(iii) and (e)(3).670 Broker-dealers carrying the greatest 

adverse selection risk could determine that their execution risk is improved by remaining 

anonymous, despite the possibility that their anonymity could signal that they carry above 

average adverse selection risk.671 However, the Commission estimates that this effect on the 

market would be relatively minor due to the modest number of retail brokers (20 firms)672 that 

would be expected to choose to use this certification. 

 

The Commission believes the Proposal might have both positive and negative effects on 

efficiency. The Proposal might have negative effects on the efficiency of wholesaler operations 

and the efficiency with which marketable individual investor orders are executed, but the 

Commission believes both these effects might be minimal. On the other hand, price efficiency 

might improve due to an increase in pre-trade and post trade transparency for the segmented 

orders that are exposed in a qualified auction.673  

The Proposal might decrease the overall efficiency of wholesaler operations, although 

this effect is likely to be minimal. The success of wholesalers typically relies in part on 

                                                
670  See supra note 477. 

671  See discussion in supra section VI.C.3. The Commission’s estimate is based on the number of broker-

dealers that are belied to have sufficiently large number of informed traders. 

672  See supra section VI.D.3. 

673  See supra section VII.C.1.d for further discussion of how the Proposal would increase pre-trade 

transparency and price efficiency. 



329 

 

significant investment spending on high frequency trading technology. It also relies on firm-

specific expertise that has been cultivated over time on how to most effectively utilize this 

technology. However, if increased competition due to a mandated qualified auction system 

reduces the volume and/or profit margins of wholesalers, it is conceivable that one or more 

wholesalers might exit the business of handling and internalizing individual investor orders.674 

Assuming that the market power of the industry’s most active wholesalers is at least 

partially (if not primarily) due to the particular efficiencies that these firms provide, the 

possibility of exit by one of these firms perhaps poses a risk of overall diminished efficiency. 

However, remaining wholesalers (or, alternatively, other executing brokers or OTC market 

makers) should be able to provide the routing and execution services to the customers of the 

exiting wholesaler. In fact, Rule 606 reports reveal that broker-dealers currently route to multiple 

wholesalers and do not restrict their routing to a single wholesaler. Moreover, the Commission’s 

view is that all current wholesalers would likely remain operating, albeit possibly with reduced 

profit margins. Net profit margins among wholesalers are fairly high, averaging 39.9% in Q1 

2022, compared to 19.9% for the broker-dealer industry as a whole.675 Finally, the Commission 

believes that retail brokers would be able to shift their orders towards other wholesalers without 

much difficulty in the event that any wholesalers chose to exit the business. In fact, retail brokers 

regularly re-assess whether their current allocation of trading interest to liquidity providers, 

including wholesalers, exchanges, and ATSs, is optimal. As a result, the Commission does not 

                                                
674  Wholesalers also have other business lines. While a wholesaler might stop handling and internalizing 

individual investor orders, it is possible that the wholesaler may continue to supply liquidity to individual 

orders through qualified auctions if one of its other business lines, such as an exchange market maker or 

proprietary trading desk, bids in qualified auctions. 

675  Profit margin data are calculated using FOCUS data, and calculated as [(total revenue - total 

expenses)/(total revenue)] × 100. See supra Table 16 for the share of revenue stemming from PFOF for 

NMS stock orders across PFOF brokers. The two largest wholesalers in terms of volume earned 44% and 

41% profit margins, respectively. 



330 

 

expect the Proposal to have a significant adverse effect on the overall efficiency of wholesaler 

operations. 

Additionally, the Proposal might reduce the efficiency with which marketable individual 

investor orders are executed, but these effects would likely be minimal. The proposed 

requirement that wholesalers expose marketable orders of individual investors to qualified 

auctions might reduce the efficiency with which these orders are filled because the trade 

execution would become less streamlined as a new layer of intermediation would be added to the 

lifecycle of each trade. Even in cases where originating brokers would route customer orders 

directly to qualified auctions, this process could be more complex or time-consuming for retail 

brokers than routing order flow to wholesalers that manage routing, market access and execution 

services.676 Any additional complexity or reduction in the speed of execution would tend to 

reduce the efficiency of order executions. However, the duration of the qualified auction would 

be less than or equal to 300 milliseconds,677 and the process would be automated, both of which 

would serve to limit the complexity and duration of the qualified auction. Therefore, the 

Commission believes that the overall efficiency with which marketable orders of individual 

investors are executed would not be significantly affected by the Proposal.  

                                                
676  This is assuming that the wholesalers internalize the routed orders. For those individual investor orders that 

are re-routed by wholesalers, it is possible that directly routing orders to qualified auctions may reduce 

complexity and time-to-execution for retail brokers. 

677  More specifically, once the proposed qualified auction receives the order and sends out the auction 

message, the duration of the auction is 100 to 300 milliseconds. 



331 

 

 

The Commission believes that the improvements in execution quality for individual 

investors and other market participants678 as well as improvements in price efficiency679 that 

might result from the Proposal would potentially promote capital formation.  

As investors would benefit from improved execution quality as a result of the proposed 

amendments, these investors would also likely benefit from lower transaction costs. Higher 

transaction costs may hinder customers’ trading activity that would support efficient adjustment 

of prices and, as a result, may limit prices’ ability to reflect fundamental values. Less efficient 

prices may result in some firms experiencing a cost of capital that is higher than if their prices 

fully reflected underlying values, and in other firms experiencing a cost of capital that is lower 

than if their prices accurately reflected their underlying value, as a result of the market’s 

incomplete information about the value of the issuer. This, in turn, may limit efficient allocation 

of capital and capital formation. By improving order execution quality and reducing transaction 

costs, the proposed amendments would reduce financial frictions and promote investor’s ability 

to trade. Furthermore, improvements in price efficiency as a result of the Proposal would cause 

firms’ prices to more accurately reflect their underlying values, which may also improve capital 

allocation and promote capital formation. 

D. Reasonable Alternatives 

A central aim of Proposed Rule 615 is to retain the benefits of segmenting individual 

investor orders. A second concern that this proposal addresses involves the nature of the 

                                                
678  See supra section VII.C.1.b for a discussion of how the Proposal would improve execution quality for 

individual investors and supra section VII.C.1.c for how the Proposal would improve execution quality for 

other market participants, including institutional investors.  

679  See supra section VII.C.1.d for further discussion of how the Proposal would increase pre-trade 

transparency and price efficiency. 



332 

 

information transmitted to the market by the originating broker. The first type of reasonable 

alternatives discussed below varies by who can segment, the degree of segmentation, and 

whether prescriptive changes to routing practices are required. The discussion addresses these 

questions with options that vary along degrees of prescriptive rules, versus relying on market 

incentives alone. The Commission also considered additional types of alternatives, namely: (1) 

alternative definitions of segmented orders, (2) alternative auction designs, including the degree 

to which auction design is set by rules or determined by open competition centers, (3) alternative 

exceptions to the order competition requirement, and (4) variation in the definition of open 

competition center. Finally, the Commission also considered alternatives such as mandating 

information barriers within wholesaler business functions, allowing exchanges to display quotes 

in retail liquidity programs, and a separate retail NBBO as well as a disclosure-only alternative. 

These alternatives could be used together or in combination with each other and could also be 

paired with other elements of the Proposal. Where applicable the Commission has specified 

which alternatives would likely be paired together when considering the economic impact of the 

alternative. 

 

 

The first alternative to the Proposal is that the Commission could introduce a trade-at 

prohibition as part of Regulation NMS. A trade-at prohibition would: (1) prevent a trading center 

that was not quoting from price-matching protected quotations and (2) permit a trading center 

that was quoting at a protected quotation to execute orders at that level, but only up to the 

amount of its displayed size. Orders would not be able to be executed at a trading center not 

displaying a quote unless the orders were executed with at least a minimum amount of price 

improvement as established by the Commission. There could be exceptions for trades at the 



333 

 

NBBO midpoint or trades based on a reference price, such as VWAP trades. This would mean 

that any trading center not displaying a quote, including ATSs and wholesalers, could not 

execute a trade unless it offered at least the minimum amount of price improvement over the 

NBBO. Exchanges would still be able to offer separate RLP programs in order to segment the 

marketable orders of individual investors. However, because quotes in RLPs would not be 

displayed, quotes in RLPs would also be restricted from executing orders unless they offered the 

minimum amount of price improvement over the NBBO.680 

The Commission could establish a low value for the minimum amount of price 

improvement of 0.1 cent. It could alternatively establish higher values for a minimum amount of 

price improvement ranging up to a full tick size (i.e. 1 cent), with exceptions for midpoint 

executions.681 If the Commission chose a higher value for the minimum amount of price 

improvement, then the economic effects of this alternative would be larger (i.e. a greater increase 

in displayed liquidity, a greater share of orders being routed to exchanges, etc.). 

A number of markets have examined the effects of a trade-at rule. Studies have examined 

the introduction of a trade-at prohibition in Canada and Australia. In Canada, results indicate that 

dark trading declined and trading on lit venues increased when the trade-at prohibition was 

imposed.682 There were not significant changes in overall spreads or volatility. Displayed depth 

                                                
680  If this alternative were combined with the alternative to allow exchanges to display quotes in RLPs, then 

displayed quotes in RLPs would be able to execute at NBBO without offering price improvement.  

681  The Commission also is proposing to amend Rule 612 regarding the tick size. See Minimum Pricing 

Increments Proposal, supra note 98. The Commission encourages commenters to review that proposal to 

determine whether it might affect their comments on this proposing release. 

682 See Baiju Devani, Lisa Anderson & Yifan Zhang, Inv. Indus. Regulatory Org. Can., Impact of the Dark 

Rule Amendments (May 7, 2015), available at https://paperzz.com/doc/8507782/impact-of-the-dark-rule-

amendments.  

https://paperzz.com/doc/8507782/impact-of-the-dark-rule-amendments
https://paperzz.com/doc/8507782/impact-of-the-dark-rule-amendments


334 

 

increased, but total market depth, i.e., hidden plus displayed depth, did not change.683 Some 

measures showed a decline in price efficiency.684 Empirical research has also looked at 

differences in trader-types and found that the trade-at prohibition eliminated intermediation of 

individual investor orders in dark venues and shifted individual investor orders onto the lit 

market with the lowest trading fee.685 Findings indicate that this resulted in individual investors 

receiving less price improvement, retail brokers paying higher trading fees to exchanges, and 

high-frequency traders earning higher revenues from trading fees.686 Using Australian market 

data, researchers found that a trade-at prohibition decreased off-exchange trading and 

internalization, with more off-exchange trades executing at the midpoint.687 They also found that 

the trade-at prohibition increased quoted spreads.688 However, because these countries had 

different market structures than the U.S. market in NMS stocks (e.g. less fragmentation and less 

trading occurring off-exchange) the effects observed from the trade-at-prohibitions in these 

studies may not be similar if a trade-at-prohibition were applied to NMS stocks in the US. 

The US Tick Size Pilot in NMS stocks imposed a trade-at requirement for one of the test 

groups (Test Group 3), although there were a number of exceptions, including for individual 

investor orders.689 One academic paper that examined the effects of the Tick Size Pilot, including 

                                                
683  Id. 

684  Id. 

685  See Carole Comerton-Forde, Katya Malinova & Andreas Park, Regulating Dark Trading: Order Flow 

Segmentation and Market Quality, 130 J. Fin. Econ. 347 (2018). 

686  Id. 

687  See CFA Inst., Trade Rules in Australia and Canada: A Mixed Bag for Investors (Nov. 2014), available at 

https://www.cfainstitute.org/-/media/documents/issue-brief/policy-brief-trade-at-rules.ashx. 

688  Id. 

689  The Tick Size Pilot Program was an NMS plan designed to allow the Commission, market participants, and 

the public to study and assess the impact of wider minimum quoting and trading increments—or tick 

sizes—on the liquidity and trading of the common stocks of certain small-capitalization companies. The 

Tick Size Pilot began in Oct. 2016 and ended in Sept. 2018. The Tick Size Pilot included NMS common 

https://www.cfainstitute.org/-/media/documents/issue-brief/policy-brief-trade-at-rules.ashx


335 

 

the effects of the trade-at prohibition,690 found that the effects of the trade-at prohibition varied 

based on whether the stock was tick-constrained or unconstrained.691 The authors generally 

found that in tick-constrained stocks the trade-at prohibition decreased quoted and effective 

spreads, increased displayed depth at the NBBO, and increased trading volume. In contrast, 

unconstrained stocks did not experience significant changes in spreads or displayed depth and 

experienced a decrease in trading volume. Both tick-constrained and unconstrained stocks 

experienced an increase in quote volatility and a decrease in average trade size. Other empirical 

research indicates that the trade-at prohibition reduced the volume of trading off-exchange, with 

more trading occurring on inverted exchanges (i.e., those exchanges that pay a rebate for 

                                                
stocks that had a market capitalization of $3.0 billion or less, a closing price of at least $2.00, and a 

consolidated average daily volume of one million shares or less (“Pilot Securities”). The Pilot Securities 

were divided into one control group and three test groups. Each test group contained approximately 400 

Pilot Securities and the remaining Pilot Securities were in the control group. The Pilot Securities assigned 

to Test Group One (“TG1”) were quoted in $0.05 per share increments but continued to trade at the current 

price increments, subject to limited exceptions. The Pilot Securities assigned to Test Group Two (“TG2”) 

were quoted in $0.05 per share increments like those in TG1, but were traded in $0.05 per share 

increments, subject to certain exceptions, including exceptions that permit executions that were the (1) 

midpoint between the national or protected best bid and the national or best protected offer, (2) retail 

investor orders with price improvement of at least $0.005 per share, and (3) negotiated trades. The Pilot 
Securities assigned to Test Group Three (“TG3”) were quoted in $0.05 per share increments and traded in 

$0.05 per share increments consistent with TG2. TG3 Pilot Securities were also subject to a Trade-at 

Prohibition, which generally prevented price matching by a trading center that was not displaying the best 

price unless an exception applied. The Trade-at Prohibition had exceptions that were similar to those 

provided in Rule 611 of Regulation NMS. Pilot Securities in the control group continued to quote and trade 

at the current tick size increment of $0.01 per share. See Order Approving the National Market System Plan 

to Implement a Tick Size Pilot Program, Securities Exchange Act Release No. 74892 (May 6, 2013), 80 FR 

27541. 

690  See Barbara Rindi & Ingrid M. Werner, U.S. Tick Size Pilot (Fisher Coll. Bus. Working Paper No. 2017-

03-018, Charles A. Dice Ctr. Working Paper No. 2017-18, last revised Mar. 17, 2019), available at 

https://ssrn.com/abstract=3041644 (retrieved from Elsevier database) (hereinafter “Rindi and Werner 

(2019)”).  

691  Rindi and Werner (2019) defined tick-constrained as a stock having an average quoted spread of five cents 

or less during the time period before the Tick Size Pilot was implemented. They define an unconstrained 

stock as one having an average quoted spread of 10 cents or greater during the time period before the Tick 

Size Pilot was implemented. 

https://ssrn.com/abstract=3041644


336 

 

demanding liquidity and charge a fee for supplying liquidity).692 However, the results observed 

from the trade-at-prohibition in the Tick Size Pilot may not be similar if a trade-at-prohibition 

were applied to all stocks, because the Tick Size Pilot was limited to stocks with smaller market 

capitalizations and also involved a simultaneous increase in the tick size to five cents.693  

Overall, the Commission believes that a trade-at prohibition would result in more orders 

being routed from ATSs to exchanges and an increase in displayed depth on the LOB compared 

to the Proposal.694 However, it is uncertain to what degree total depth would increase because the 

increase in displayed depth could mostly come from market participants choosing to display 

orders they currently hide on LOBs. If most of the increase in displayed depth came from market 

participants choosing to display orders they currently hide, then total depth in the LOB (i.e., 

hidden plus displayed depth) under this alternative may be similar to total depth in the LOB 

under the Proposal. However, LOB depth may increase if OTC market makers that currently 

internalize trades off-exchange increased their liquidity supplied to the LOB in order to be able 

to trade without offering the minimum amount of price improvement.695 There is also uncertainty 

about what would happen to spreads under this alternative. Based on the evidence from 

implementing a trade-at rule in other countries, spreads (both quoted and effective) may not 

significantly change compared to the Proposal. However, it is also possible that quoted and 

                                                
692  See Carol Comerton-Forde, Vincent Grégoire & Zhuo Zhong, Inverted Fee Structures, Tick Size, and 

Market Quality, 134 J. Fin. Econ.141 (2019). 

693  Additionally, a number of exceptions applied to the Tick Size Pilot trade-at prohibition, including an 

exception for retail orders. 

694  This may help reverse a decline in pre-trade transparency. Market participants have stated that liquidity 

displayed at or near the NBBO on exchanges has declined over time. An analysis by an exchange 

separately finds off-exchange trading has also increased over a similar time period. See supra notes 375 and 

376 and accompanying text. 

695  If the minimum pricing increment were larger, then OTC market makers may submit more liquidity to a 

LOB. 



337 

 

effective spreads could decline on exchanges if more orders from individual investors are routed 

for execution to exchange LOBs.696 More trading volume (including more orders from 

institutional investors) may also shift from ATSs to exchanges because the trade-at rule may 

prevent ATSs not displaying quotes from executing a trade unless they provide a minimum 

amount of price improvement to the NBBO.697 This shift in order flow from ATSs to exchanges 

could increase transparency and may further lower spreads, increase liquidity, and improve price 

efficiency relative to the Proposal. 

Under this alternative, wholesalers would likely internalize more individual investor 

marketable orders compared to the Proposal. However, the threshold the Commission selects for 

the minimum amount of price improvement would affect to what degree wholesalers internalize 

the marketable orders of individual investors.698 If the Commission selected a smaller threshold, 

e.g. a threshold of 0.1 cents or 0.2 cents, then this would result in more marketable orders of 

                                                
696  Because individual investor orders exhibit lower adverse selection risk, the average adverse selection risk 

faced by liquidity suppliers on exchanges could decrease, which may cause them to quote at more 

aggressive prices, resulting in a reduction in quoted and effective spreads. See Glosten and Milgrom (1985) 

for a discussion of how adverse selection risk affects quoted spreads. However it is also possible that this 

effect may be limited if tighter quoted spreads also cause market participants that pose greater adverse 

selection risk to increase their liquidity demanding orders, which could potentially increase the adverse 

selection risk faced by liquidity suppliers on exchange LOBs. 

697  The shift in volume from ATSs to exchanges would be greater if the Commission set a larger threshold for 

the minimum amount of price improvement needed to execute the order. 

698  This effect would also vary based on the quoted spread of the stock. For stocks with quoted spreads above 
two cents, even if the minimum threshold price improvement threshold was set at a full tick, wholesalers 

would likely internalize more order flow compared to the Proposal because they would have had to offer 

more than 1 cent of price improvement in order to internalize individual investor orders at the midpoint 

without having to expose them in qualified auctions. If the Commission selected a minimum price 

improvement threshold of a full tick, then stocks with quoted spreads less than two cents may have 

wholesalers internalize less individual investor orders under this alternative compared to the Proposal. 

These effects would vary if the minimum tick size for a stock was different. The Commission also is 

proposing to amend Rule 612 regarding the minimum tick size. See Minimum Pricing Increments Proposal, 

supra note 98. The Commission encourages commenters to review that proposal to determine whether it 

might affect their comments on this proposing release. 



338 

 

individual investors being internalized by wholesalers.699 Because these orders would not be 

exposed to order-by-order competition when they are internalized by wholesalers, the average 

price improvement individual investors receive on their marketable orders would likely be 

reduced, and the transaction costs of these orders would be higher, relative to the Proposal. 

Under this alternative, broker-dealers and trading centers would not have the costs 

associated with identifying and handling segmented orders, but they would have additional costs 

associated with developing policies and procedures and adjusting their systems to implement the 

trade-at requirements. 

 

As an alternative to mandating segmented orders be routed to qualified auctions, the 

Commission could allow exchanges to run auctions with 0.1 cent pricing increments that the 

orders of all market participants would be eligible to trade in.700 Exchanges would be able to run 

separate auctions for their RLPs and for orders that were not eligible to be submitted to their 

RLPs, which would allow exchanges to maintain some degree of segmentation (alternatively, the 

Commission could permit a greater degree of segmentation as in the alternative below). This less 

prescriptive alternative would allow exchanges to offer sub-penny price improvement to a wider 

set of market participants outside of their RLP programs. As in the trade-at alternative 

considered above, it would maintain the current separation between how market entities are 

allowed to segment orders, and the relative anonymity of orders on exchange. By not 

                                                
699  The proportion of individual investor order flow internalized by wholesalers would decline as the threshold 

for the minimum amount of price improvement increases, because wholesalers would have to offer more 

price improvement to internalize these orders. 

700  Currently, exchanges are able to offer smaller pricing increments in their RLPs, but Rule 612 still applies to 

other auctions that they run (e.g. open and closing auctions and auctions following a trading halt). This 

alternative would allow exchanges to offer smaller pricing increments for these other auctions.  



339 

 

contributing to further segmentation of orders, relative to the Proposal, this alternative might 

lower the cost for trading for investors currently identified as having order flow with greater 

price impact. Because broker-dealers and trading centers would not have to establish policies and 

procedures for identifying and handling segmented orders, this alternative would have 

significantly lower costs than the Proposal. However, it offers no clear mechanism for creating 

significantly greater competition for segmented orders, nor in improving execution quality for 

segmented orders as defined in the Proposal. 

 

As a variation on the Trade-at Requirement alternative discussed above, the Commission 

could only establish a trade-at requirement for segmented orders, as defined by the Proposal or in 

combination with an alternative definition of segmented orders as discussed below. This 

alternative would limit both the potential positive and negative effects of the Trade-at alternative 

because it would apply to a smaller set of orders. Relative to the two alternatives above, it would 

maintain the definition of segmented orders, thereby still contributing to the complexity that 

these two alternatives seek to avoid. However, like the Proposal, it would potentially expose 

segmented orders to order-by-order competition. The degree of this competition would depend 

on the minimum price improvement threshold selected because a higher threshold would result 

in less internalization and more routing of orders to exchanges, where they would be exposed to 

order-by-order competition. It would also depend on whether these orders were revealed to be 

segmented orders—given a flag, or sent to an existing RLP program—and whether they also 

identify the originating broker. The less information, the lower the degree of segmentation, 

which may help liquidity in general and segmented orders presenting more adverse selection 

risk, but might limit the ability for segmented orders presenting less adverse selection risk to gain 

price improvement. Unlike the Trade-at Requirement alternative discussed above, this alternative 



340 

 

is explicitly compatible with the provision in the Proposal to prevent a routing broker to post a 

quote in a way that has priority, thereby potentially lessening the information asymmetry and 

increasing competition if it works as intended. 

 

As an alternative, the Commission could introduce the proposed definition of a 

segmented order and permit exchanges to offer separate auction mechanisms for segmented 

orders with finer trading increments, but not introduce a requirement for segmented orders to be 

exposed in these auctions. There would be no minimum trading volume requirement in order for 

exchanges to be able to run these segmented auctions and exchanges would have greater 

flexibility in designing these auctions, similar to the alternative discussed in section VII.D.3.a 

below. Similar to the Proposal, this alternative would introduce the definition of segmented 

orders and with it the additional complexity. Relative to the Proposal, it contains no prescriptive 

requirements for auctions, and thus may have lower costs for implementing them, similar to the 

alternative in section VII.D.1.b. Because more exchanges would be able to offer segmented 

auctions, there may be greater competition among market centers that are able to offer 

segmented auctions compared to the Proposal. 

 

 As an alternative, the Commission could allow national securities exchanges to offer 

separate trading mechanisms for segmented orders in addition to qualified auctions, such as 

allowing exchanges to continue to operate RLPs. In addition to being able to submit a segmented 

order to an exchange LOB or a qualified auction, broker-dealers could also submit a segmented341 

 

order to execute in other exchange trading mechanisms designed for segmented orders.701 

Separate trading mechanisms for segmented orders could also be priced in 0.1 cents increments, 

but, similar to current market practices, quotes in exchange RLP programs would not be 

displayed in exchange proprietary feeds or consolidated market data.702  

 Compared to the Proposal, this alternative might improve competition among exchanges, 

and improve the competitive position of lower-volume exchanges, because they would be 

allowed to offer trading mechanisms for segmented orders even if they fell below the 1% 

average daily volume requirement necessary to run a qualified auction. This might result in less 

trading volume in segmented orders concentrating on larger exchanges, which could reduce the 

risk that one or more small exchanges might exit the market. It would also improve the ability of 

market participants that might not possess the speed necessary to respond to qualified auction 

messages, e.g., individual investors or professional traders that do not utilize algorithmic trading 

technology, to compete to supply liquidity to segmented orders. There may be more methods 

available for them to supply liquidity to segmented orders that do not require the speed necessary 

to respond to qualified auction messages, such as posting quotes in exchange RLP programs.703 

  However, compared to the Proposal, this alternative may increase the ability of 

wholesalers or other broker-dealers handling segmented orders to indirectly internalize an order 

                                                
701  Exchanges could either adjust the definitions of orders they accepted to their RLPs to conform with the 

definition of segmented orders or they could allow a broader set of individual investor orders of which 

segmented orders would be a subset. 

702  A flag would still be disseminated next to an exchange quote in consolidated market data indicating that 

there was liquidity present in an exchange’s RLP program at a price better than the NBBO. 

703  If an exchange operated both a qualified auction and an RLP program, liquidity supplying orders submitted 

to the exchange’s RLP program could be incorporated into qualified auctions. Because they could submit 

resting orders to RLP programs, liquidity suppliers that were not fast enough to submit bids in qualified 

auctions would still be able to submit an order in 0.1 cent pricing increments that would only supply 
liquidity to a segmented order. However, they may not be able to factor in information on the originating 

broker submitting the segmented order into the liquidity supplying orders they submit to qualified auctions. 



342 

 

by executing it against a quote they are posting in another trading mechanism for segmented 

orders, such as an RLP program. In these other trading mechanisms, the broker-dealer may 

maintain a larger information advantage than it would have with qualified auctions, because 

these other trading mechanisms may not require identity disclosure of the originating retail-

broker. However, since qualified auctions would still be available and there may be additional 

competition from liquidity on smaller exchanges, the average price improvement and trading 

costs for marketable orders of individual investors may not be significantly different under this 

alternative compared to the Proposal. 

 This alternative could also allow quotes in RLPs to be displayed in proprietary feeds and 

in consolidated market data. This would potentially increase the transparency of liquidity 

available to segmented orders and may further improve their order routing and execution quality 

compared to not displaying RLP quotes under this alternative. Displaying quotes in RLP 

programs may also further enhance the competitive position of smaller exchanges and new 

exchanges that enter the market that do not meet the criteria for an open competition trading 

center but may operate an RLP. Displaying exchange RLP quotes would provide more 

transparency into the liquidity available to the orders of individual investors on these exchanges, 

which might result in more individual investor orders being routed to these exchanges when the 

prices of displayed quotes are equal to or better than the expected execution prices individual 

investor orders may expect to receive in qualified auctions (e.g., if the RLP is posting a quote at 

the NBBO midpoint).  



343 

 

 

 

The Commission understands that current market practices concerning definitions of 

retail orders often relies on brokers representing retail flow as coming from natural persons.704 In 

addition, a number of SRO rules prohibit the use of trading algorithms or computerized 

technology for the eligibility of retail orders for their RLP programs.705 As an alternative to the 

proposed definition of segmented order, the Commission could adopt a definition of segmented 

order that consisted of these two elements, i.e., the order must be submitted by a natural person 

and does not originate from a trading algorithm or any other computerized methodology,706 but 

without any thresholds based on the number of trades executed or orders submitted by the 

account.  

Compared to the Proposal, this could result in fewer orders meeting the definition of a 

segmented order. Although a small number of additional individual investor accounts would now 

meet the definition of segmented order because there would be no minimum trade threshold,707 a 

number of orders that previously would have been included under the Proposal could be 

excluded because they originate from a trading algorithm or any other computerized 

methodology.708 The Commission does not have data on how many retail orders originate from 

                                                
704  See supra notes 188, 189, and 190 and related discussions (discussing natural person in context of 

definitions of retail orders) 

705  See supra note 193 (discussing restrictions on retail orders originating from a trading algorithm). 

706  Similar to the proposed definition 600(b)(91)(i), the order could originate from a natural person or an 

account held in legal form on behalf of a natural person or group of related family members. 

707  See analysis and discussion of the distribution of individual investors’ average daily number of orders 

resulting in a trade in infra Table 22. 

708  It is also possible that the orders from individual investor accounts that average 40 or more trades a day 

could also be excluded under this alternative if the orders originate from a trading algorithm or any other 

computerized methodology. 



344 

 

trading algorithms or any other computerized methodology, but the Commission understands that 

a number of retail brokers allow individual investors to trade through APIs and that a number of 

retail brokers may use trading algorithms to generate orders for individual accounts.709 To the 

extent that orders originating from a trading algorithm or computerized methodology have larger 

adverse selection risk than other orders originating from individual investors that met the 

definition of a segmented order, then the adverse selection risk of segmented orders in qualified 

auctions may decrease and liquidity suppliers might offer slightly greater price improvement to 

segmented orders in qualified auctions under this alternative compared to the Proposal. The costs 

to originating brokers for identifying segmented orders under this alternative may be similar to 

the Proposal.710 

 

Rather than using average number of trades, the Commission could rely on an alternative 

metric, such as average number of orders submitted by an individual investor’s account to 

identify the threshold for the definition of segmented orders. The Commission understands that 

some exchanges in the options market have designed definitions of retail orders that rely on a 

criteria based on the average number of orders an account originates per day, as opposed to the 

average number of trades.711 

                                                
709  For example, if a retail broker has automated methods for rebalancing an individual investor’s account, it 

may generate orders using a trading algorithm. 

710  Although originating brokers may not need to keep track of the average number of trades each individual 

investor account executes under this alternative, they would need to have systems to track if an order 

submitted by an account originated from a trading algorithm or computerized methodology.  

711  See supra note 197 for a discussion of how the average number of orders submitted per day from a 

customer’s account is included in the definition of a “Professional” order. 



345 

 

The economic effects of using an average order threshold would largely depend on the 

threshold selected. If the Commission selected an average order threshold that corresponded to a 

similar percentage of accounts being excluded as the proposed trade threshold, i.e., if the 

Commission selected an average orders per day cutoff so that 99.9% of individual investor 

accounts were below the threshold, then the economic effects of this alternative would likely be 

similar to those described in the Proposal. If the Commission varied the threshold, then the 

economic effects would likely be similar to the effects of varying the average trade threshold 

discussed below in section VII.D.2.c. Similar to the Proposal, originating brokers would have to 

develop systems to identify individual investor accounts that meet definition of a segmented 

order. However, these costs may be higher if it is more difficult for an originating broker to 

develop systems that track the average number of orders that originate from a customer’s account 

compared to the number of trades. 

 

 The Commission could adopt alternative definitions of a segmented order by varying the 

threshold for the average daily number of trades in NMS stocks that a natural person or group of 

related family members would need to be under in order for their orders to qualify as segmented 

orders, including not having a maximum number of trades per day threshold.712 

Table 22 estimates the distribution of the average daily number of orders that an 

individual investor’s account originates and results in a trade (conditional on the individual 

                                                
712  If there were no trade threshold, then the segmented order definition would be similar to the criteria that 

some exchanges use to determine which investor orders are eligible to execute in their RLP programs. 

Although some exchanges also have criteria using the average number of orders submitted by the natural 

person as a threshold for determining which orders are eligible to be submitted to their RLP programs. See 

supra note 188 and accompanying text for discussions of the orders that are eligible to be submitted to 

RLPs.  



346 

 

investor submitting an order during the observation period). The analysis shows that 99.9% of 

individual investor accounts average 14.3 or fewer orders that result in a trade each day and that 

99% of individual investor accounts average 1.86 or fewer orders that result in a trade each day.  

Table 22: Distribution of Individual Investors’ Average Daily Number of Orders Resulting in a Trade 

Mean Std Min 25% 50% 75% 99% 99.9% 99.99% 99.999% Max 

0.20 118.74 0.00 0.01 0.02 0.06 1.86 14.30 83.92 318.83 667,289.34 

This table uses CAT data to estimate the distribution of the average daily number of orders that an individual 

investor’s account originates and are associated with a trade. This is estimated from CAT identified Individual 

Customer accounts that originated an order during the six month period from Jan. 1, 2022, through June 30, 2022. 

Because this analysis only includes Individual Customer Accounts that originated an order during this time period, it 
may overestimate the value at a given percentile because accounts originating zero orders are not included in the 

distribution. See supra note 194 for additional details on the analysis. 

If the average trade threshold were lowered, fewer individual investors would meet the 

definition of a segmented order and be eligible to have their orders be routed to qualified 

auctions. Individual investors that no longer met the definition of segmented orders would 

experience lower execution quality than under the Proposal because their orders would not be 

eligible to be segmented and participate in qualified auctions. Instead, these orders would likely 

either be internalized by wholesalers without being subject to order by order competition if they 

have lower adverse selection risk or routed and executed on an exchange LOB or ATS if 

wholesalers don’t want to internalize them. If these orders have larger adverse selection risk than 

the average orders of individual investors that fall below the average trade threshold, then the 

average adverse selection risk of segmented orders in qualified auctions may decrease and 

liquidity suppliers might offer slightly greater price improvement to segmented orders in 

qualified auctions under this alternative compared to the Proposal. However, as long as the 

average trade threshold remained above 15 trades per day, then the effects of this alternative may 

not be that significant, because it would affect less than 0.1% of individual investors.  



347 

 

If the average trade threshold were increased or eliminated, then orders of more 

individual investors would be included in qualified auctions. However, the proportion of 

individual investors that meet the definition of segmented orders under this alternative, but do 

not under the Proposal would be small because more than 99.9% of individual customer accounts 

average less than 40 trades per day. The marketable orders of individual investors that average 

more than 40 trades per day and meet the definition of segmented order under this alternative 

may receive more price improvement and lower transaction costs compared to the Proposal 

because their orders would now be eligible to be included in qualified auctions. However, the 

orders of these individual investors that trade more frequently may have greater adverse selection 

risk compared to orders from individual investors that trade less frequently. Compared to the 

Proposal, this may result in the average adverse selection risk increasing in qualified auctions 

and liquidity suppliers bidding in auctions may offer less price improvement on average. This 

would result in the orders of individual investors that average less than 40 trades per day 

receiving less price improvement on their marketable orders and paying higher transactions costs 

than they would under the Proposal. This would effectively result in a transfer from individual 

investors that average less than 40 trades per day to the ones that average more than 40 trades per 

day. Institutional investors may also see increased transactions costs compared to the Proposal 

because they may be more likely to supply liquidity to individual investors with higher adverse 

selection risk. However, if individual investors with more than 40 trades per day are limited to a 

few broker-dealers, then the potential disclosure of the originating broker in qualified auctions 

may limit the effect to these broker-dealers. 



348 

 

 

 

As one alternative, the Commission could allow open competition trading centers more 

flexibility in designing qualified auctions. This would include allowing open competition trading 

centers more flexibility in setting matching protocols, priority structure, auction duration, 

disclosure of the identity of the originating broker, and auction fees and rebates. However, the 

Commission could still specify a minimum auction duration (open competition centers could 

choose greater times). The Commission could also still specify that execution priority shall not 

be based on time of receipt of the auction response (otherwise, it is not clear how an auction 

might differ significantly from the limit order book). 

Compared to the Proposal, this alternative could lead to greater innovation in the design 

of qualified auctions and foster greater competition among open competition trading centers that 

run qualified auctions. However, it could also lead to the design of qualified auctions with 

mechanisms that could provide a greater advantage to certain liquidity suppliers, which could 

result in less competition among liquidity suppliers, and reduced benefits that come from it, 

including less improvement in individual investor and institutional investor execution quality 

compared to the Proposal.  

Allowing more flexibility in the design of qualified auctions could enhance innovation 

compared to the Proposal by allowing open competition trading centers to incorporate auction 

features that better fit the needs of different market participants, which in turn could improve 

order execution quality for some market participants compared to the Proposal. More flexibility 

in the design of qualified auctions could also promote further competition among open 

competition trading centers and lead to greater differentiation among qualified auction 



349 

 

mechanisms in order to attract segmented orders and liquidity suppliers. It could also lead to 

more open market trading centers operating qualified auctions, since an exchange group might be 

more likely to operate multiple qualified auctions if it has the flexibility to implement different 

designs at different exchanges. This, however, could result in greater fragmentation of individual 

investor order flow and liquidity supply across qualified auctions compared to the Proposal and 

result in decreased competition among liquidity suppliers to individual qualified auctions and 

less price improvement for individual investors relative to the Proposal. 

Compared to the Proposal, allowing greater flexibility in qualified auction designs could 

result in some open competition trading centers designing auction mechanisms that provide a 

greater competitive advantage to some types of bidders over others. For example, an open 

competition trading center could design an auction that includes an auto-match pricing feature 

(where the order automatically adjusts to match the price of the best auction bid), and an 

allocation guarantee to the participant that initially brought the order to the auction if it provided 

the best bid. This would provide a competitive advantage to whichever market participant 

brought the order to the auction and increase the likelihood that it would trade with the individual 

investor order. This could result in market participants directing individual orders to qualified 

auctions that offered them a greater competitive advantage, which would result in less 

competition among market participants to supply liquidity to individual investor orders and 

worse execution quality for individual investor orders compared to the Proposal. 

Additionally, because this alternative would not require qualified auctions to ensure 

customer priority if multiple bids are at the same price, it could reduce the likelihood of other 

investors trading directly with individual investor orders compared to the Proposal (e.g., it could 

increase the chance of broker-dealers bidding in qualified auctions getting priority over 



350 

 

institutional orders at the same price compared to the Proposal). This could result in less 

improvement in the execution quality for the orders of institutional investors compared to the 

Proposal.713  

 

 As an alternative, the Commission could vary the minimum and maximum durations for 

the qualified auction, making both larger or smaller. Variations in the duration of qualified 

auctions results in a trade-off between NBBO slippage and the exposure of the auctioned order 

flow to potential bidders. Because the NBBO may vary over short time horizons, auctioned 

orders may become stale or priced outside the NBBO as best quotes move. This effect calls for 

shorter auction durations. However, longer auction durations provide a longer opportunity, after 

observing the auction message through the SIP, for other participants to interact with the 

auctioned order flow, potentially raising the number of bidders in qualified auctions. 

The Commission performed analysis to estimate the risk of quote slippage for different 

auction lengths by observing the likelihood that that the NBBO spread moves (i.e., the “fading 

probability”) as the time lag increases (in milliseconds) after internalization of an individual 

investor order.714 Research indicates there is a few-millisecond gap between an off-exchange 

trade and the reporting of that trade to the SIP.715 Assuming this lag applies to internalized 

individual investor orders as well, NBBO movements were measured during the initial moments 

                                                
713  See supra section VII.C.1.c discussing improvements in execution quality for institutional investors. 

714  From Daily TAQ’s NBBO and Quote files, NBBO updates are constructed based on nanoseconds time-

stamps. Each quote update is matched up with the NBBO that is in effect for different durations of time (in 

milliseconds) after internalization. These durations include 25, 50, 75, 100, 200, 300, and 500 milliseconds. 

715  See Thomas Ernst & Chester S. Spratt, Payment for Order Flow and Asset Choice (last revised May 16, 

2022) (unpublished manuscript), available at https://ssrn.com/abstract=4056512 (retrieved from Elsevier 

database). 

https://ssrn.com/abstract=4056512


351 

 

following internalization of an individual investor order. This analysis is performed on 600 

randomly selected stocks that are divided into three groups: high, medium, and low activity 

stocks.716 The probability of fading is calculated at the stock level as the overall likelihood that 

the NBO (NBB) will be higher (lower) than the current NBO (NBB) for increasing durations of 

time after internalization. These probabilities are then averaged across stocks in each of the three 

groups of stocks. Figure 1 below indicates slippage probabilities for different periods of delay 

after internalization:717 

                                                
716  Six hundred stocks were randomly selected from the population of all NMS common shares and ETFs in 

Mar. 2022. Three buckets were formed from the population of stocks based on trading volume: top-500 

(high activity), 501-1,000 (medium activity), and 1,001-3,000 (low activity). Then 200 stocks were 

randomly selected from each bucket in a stratified manner, such that the final sample included stocks from 

all levels of quoted spread. 

717  Filters were used to identify off-exchange transactions (sub-penny trades) that are attributable to individual 

investors. An algorithm from Boehmer et al., supra note 572, was then used to identify buyer vs. seller 

initiated such trades. See supra note 572 for further discussions of this algorithm. 

 



352 

 

Quote updates; high-activity stocks Sub-penny retail executions; high-activity stocks 

  

Quote updates; medium-activity stocks Sub-penny retail executions; medium-activity stocks 

  

Quote updates; low-activity stocks Sub-penny retail executions; low-activity stocks 

  

Figure 1: Probability of NBBO Quote Fade following Quote Updates and Sub-Penny Off-Exchange 

Executions 

Probabilities are estimated from NYSE TAQ data in Mar. 2022 for a sample of 600 stocks that were randomly 

selected from the population of all NMS common shares and ETFs.  

Results indicate that the fade probability goes from a cross-stock average of 12% at 25 

milliseconds after a quote update, to 14% at 100 milliseconds—an increase of only 2 percentage 

points. Focusing on individual investor orders, the fade probability goes from an average of 1.7% 

at 25 milliseconds after an internalized individual investor order, to 2.9% at 100 milliseconds—

an increase of only 1.2 percentage points.  



353 

 

These findings suggest that changing qualified auction lengths relative to the proposed 

100 milliseconds length would not significantly change the chance of “adverse” price 

movements when an auction message is disseminated. The Commission believes, based on this 

analysis, that the chance of the quotes moving against the individual investor order does not 

significantly increase over horizons from 20 milliseconds to 500 milliseconds long. However, the 

Commission observes that the likelihood of slippage may be greater in volatile markets. 

In addition to the low risk of slippage within the Proposal’s auction durations, the 

Commission does not believe that changing the qualified auction length would materially 

substantially impact the number of potential bidders. Trading algorithms used by most market 

participants may be fast enough to respond to an auction message in the SIP in 10 milliseconds, 

so reducing or increasing the auction length from the proposed 100 to 300 millisecond range may 

not have a significant effect on the number of bidders. The Commission also observes that, even 

at 1 second most traders using screens would not be fast enough to participate, limiting the 

additional market participants that could potentially join the auctions as bidders. However, 

auctions below 10 milliseconds may prevent some participants that utilize algorithms from 

responding timely to SIP auction messages. These limitations likely reflect geographical delay in 

the SIP, which is estimated to be up to one millisecond between trading centers in New York and 

New Jersey and up four milliseconds from Chicago to New York/New Jersey.718 

 

The Proposal sets the minimum pricing increment at 0.10 cents in a qualified auction. As 

an alternative, the Commission could lower the minimum pricing increment requirement to 0.01 

cents in the qualified auctions. Concern about a minimum pricing increment tends to occur 

                                                
718  See MDI Adopting Release, supra note 81, note 1692 and accompanying text. 



354 

 

around pennying on a limit order book, which economically acts as an erosion of time priority. 

However, auctions as required do not have time priority, and so this is less of a concern. 

Lowering the minimum pricing increments would allow bidding at more competitive prices. It 

could, however, increase the possibility of de minimis price improvement relative to the limit 

order book. This would drain liquidity from the limit order book with little benefit to investors. 

Varying the minimum pricing increment could affect the competitiveness among liquidity 

suppliers in qualified auctions and also the potential price improvement that segmented orders 

may receive. 

 

 As another alternative, the Commission could require qualified auction operators to have 

a designated liquidity provider (DLP) for each security to serve as a backstop and guarantee 

execution of a portion of the segmented order at the NBBO if an auction does not produce any 

bids. For each symbol, the number of shares a DLP would be obligated to guarantee execution 

for in an order could be set at the minimum of some percentage of the average quoted size at the 

NBBO or some percentage of the average daily executed share volume, whichever is smaller.719 

In return for the DLP backstopping the qualified auction, if the DLP were tied with other bidders 

at the best price, the DLP would be given an allocation guarantee of some percentage of the size 

of the segmented order or the size of their bid, whichever is smaller.720 If there were multiple 

bidders besides the DLP at the best price, each liquidity supplying order at the same price level 

would be assigned a random priority and, after the DLP received its allocation guarantee, any 

                                                
719  For example, the Commission could require the DLP to guarantee execution of a number of shares that 

would be equal to 25% of the average quoted size at the NBBO in a security or 0.1% of the average daily 

executed share volume in a security, whichever is smaller. 

720  For example, the Commission could guarantee that a DLP would have priority to execute 25% of the shares 

in the segmented order if it were tied with other bidders at the same price. 



355 

 

remaining shares would be filled based on the random priority ranking. However, qualified 

auction features that gave the DLP additional advantages, such as allowing it to automatically 

match the best price, would not be allowed.  

Compared to the Proposal, this alternative would provide more certainty regarding 

individual investor orders executing in qualified auctions, particularly in less liquid securities 

where there may be a higher chance that no liquidity suppliers bid in the auctions. This execution 

certainty would be greater if the DLP’s percentage execution guarantee were higher. However, 

the DLP would also be taking on greater risk, because they might have a larger inventory 

position, which would put them at greater risk if prices moved against them.  

Giving allocation guarantees to DLPs may reduce the incentive for other market 

participants to compete to supply liquidity to segmented orders compared to the Proposal, 

because they would be less likely to execute against the segmented order if they submitted an 

order at the same price as the DLP.721 The incentives of other market participants to compete to 

supply liquidity may be reduced more if the percentage of the segmented order the DLP is 

guaranteed priority to execute (i.e., the DLPs allocation guarantee) is greater.  

 

Under this alternative, qualified auction messages would not include information on the 

direction of the segmented order (i.e., whether it was a buy or sell order). Bidders would be able 

                                                
721  The reduction in incentives to compete to supply liquidity to segmented orders compared to the Proposal 

may be larger for customer orders, including the orders of institutional investors, because, in addition to the 

DLP allocation guarantee, the random priority structure would further reduce their chance of executing 
against an order when their order is tied with others at the same price compared to the Proposal (in which 

customer orders had priority in the event of a tie).  



356 

 

to submit a one sided bid (i.e., a directional bid to either buy or sell) or a two sided bid (i.e., a bid 

indicating the bidder was willing to both buy and sell).722 

On the one hand, not disclosing the direction of the segmented order may reduce bidding 

from some market participants,723 potentially resulting in less competition to supply liquidity to 

the segmented order, which may result in segmented orders receiving less price improvement 

compared to the Proposal. On the other hand, not disclosing the direction of the segmented order 

may also reduce the risk of information leakage if an institutional investor was bidding in the 

auction compared to the Proposal, because it would be more difficult to discern the direction of 

the trade.724 This could incentivize more bids from institutional investors, which could increase 

the competition to supply liquidity to segmented orders and potentially provide more 

improvement in institutional investor execution quality compared to the Proposal.  

Not disclosing the direction of the segmented order may also reduce the risk of the 

NBBO slippage during the qualified auction, i.e., the risk of the NBBO quotes moving against 

the individual investor order (e.g., the probability of an increase in the NBO for a segmented buy 

order or a decrease in the NBB for a segmented sell order).725 Because market participants 

setting the NBBO quotes would not know the direction of the segmented order, to the extent they 

                                                
722  A two sided bid could be submitted as providing some sort of price improvement over the NBBO. For 

example, a market participant supplying liquidity in the qualified auction could submit a two-sided 

response specifying that they were willing to execute the segmented order (i.e., they were willing to both 

buy and sell to the individual investor) at 0.2 cents better than the NBBO. 

723  For example, not knowing the direction of the segmented order may reduce the willingness of some market 

participants to cancel a resting order with queue position on another venue and submit it as a bid in the 

qualified auction because it is more difficult to know if their order was going to execute.  

724  See supra section VII.C.2.f for a discussion on the risk of information leakage from institutional investors 

supplying liquidity in qualified auctions. 

725  See supra section VII.C.2.b for a further discussion on individual investor slippage costs in qualified 

auctions. 



357 

 

would have adjusted their quotes in response to an auction announcement under the Proposal, 

they may be less likely to adjust their quotes under this alternative.  

 

The Proposal imposes a 5 mil access fee cap on executed auction responses and does not 

allow a fee to be charged for submitting auction responses or the submission or execution of 

segmented orders. The alternative discussed in section VII.D.3.a allows more flexibility in 

designing auctions, which could include more flexibility for exchanges to charge greater fees 

(and offer greater rebates), both from those routing orders to an exchange and from those bidding 

in an exchange. As exchanges compete to offer auctions, it is possible that access fees would be 

competed down to levels that make a cap unnecessary. However, because the auctions are 

required for certain segmented orders prior to internalization, there remains the possibility that 

this requirement could lead to access fees being set above those that would occur in the absence 

of such a requirement. Due to this market failure, setting a maximum fee may be necessary. 

Alternatively the Commission could raise the 5 mil qualified auction access fee cap to, for 

example, 10 mils, and could allow a capped fee on auction respondents and on those routing 

segmented orders to qualified auctions. This could raise the access fees charged to auction 

responses and lower the price improvement received by segmented orders, but it would raise the 

incentives for exchanges to offer auctions.  

 

 The Proposal currently requires qualified auctions to give priority to auction responses 

for the account of a customer over auction responses for the account of a broker or dealer at the 

same price. Under this alternative, the Commission could not specify priority rules requiring 

giving priority to customer auction responses. The Commission could still maintain priority 



358 

 

restrictions prohibiting time priority and prohibiting priority rules favoring the broker-dealer that 

routed the segmented order to the auction, the originating broker for the segmented order, the 

open competition trading center operating the auction, or any affiliate of the foregoing 

persons.726 Additionally, the Commission could also still maintain the proposed priority rules 

regarding how qualified auctions would interact with the continuous limit order book.727 

 While one of the goals of the Proposal is to promote the NMS objective set forth in 

section 11A(a)(1)(C)(v) of the Exchange Act and maximize the potential for customer orders to 

interact with other customer orders,728 giving priority to customer orders may discourage 

liquidity provision by broker-dealers in qualified auctions. Compared to the Proposal, this 

alternative could encourage greater participation by traditional liquidity providers, such as 

exchange market makers and other OTC dealers, in qualified auctions. However, it might 

discourage other customers, including institutional investors, from participating in qualified 

auctions, which may be contrary to one of the goals of the proposal.  

 

 As an alternative, the Commission could not permit the identity of the originating broker 

to be disclosed in qualified auction messages. If the identity of the originating broker were not 

revealed to bidders in qualified auctions, then they would need to price their auction responses 

based on the average adverse selection risk of the segmented orders in the qualified auctions. 

 Relative to the proposal, this has the potential to improve pricing and liquidity for the 

individual investor orders from retail brokers presenting greater adverse selection risk, thereby 

                                                
726  See supra section IV.C.5 for further discussions on these priority restrictions. 

727  See id. (discussing proposed Rule 615(c)(5)(v)). 

728  See id. (discussing proposed Rule 615(c)(5)(ii)). 



359 

 

increasing incentives for information production and potentially improving price efficiency. 

However, it may also potentially reduce the price improvement and increase transaction costs for 

individual investor orders of retail brokers presenting lower adverse selection risk, since their 

orders could not be distinguished from the orders of customers of retail brokers that imposed 

greater adverse selection risk. Additionally, if wholesalers continue to route segmented orders 

and bid in qualified auctions, then they would have a larger information advantage relative to 

other participants in qualified auctions because they would be aware of the identity of the 

originating broker of a segmented order they submit to the qualified auction. This could reduce 

the incentives of other market participants to supply liquidity in qualified auctions, because they 

may be more likely to suffer from winner’s curse, i.e., they would be more likely to only win 

qualified auction in which the wholesaler submitting the segmented order to the auction didn’t 

want to bid aggressively because the individual investor order posed greater adverse selection 

risk. This could reduce competition among liquidity suppliers in qualified auctions and result in 

less price improvement and higher transactions costs for segmented orders compared to the 

Proposal. 

 

 

 As an alternative, the Commission could consider varying the proposed $200,000 

threshold of the order dollar value exception for having to expose a segmented order in a 

qualified auction by either increasing or decreasing the threshold. Table 23 estimates the 

distribution of the dollar value of executed orders submitted by individual investors. 

Approximately 98.9% of individual investor orders have a dollar value less than $200,000 and 

more than 95% of individual investor orders have a dollar value less than $55,000. Therefore, 



360 

 

unless the proposed order dollar value exception threshold is reduced significantly, the vast 

majority of individual investor orders would remain below the threshold level. Similarly, 

increasing the threshold level would not significantly increase the percentage of orders that 

would be required to be exposed in qualified auctions. 

Table 23: Distribution of Dollar Value of Orders Submitted by Individual Investor 

10 Pct 25 Pct 50 Pct 75 Pct 90 Pct 95 Pct 99 Pct 

$21.21 $136.13 $1,019.01 $6,232.51 $25,243.63 $54,728.69 $209,281.75 

This table presents analysis of CAT data showing the distribution of the original dollar value of orders that 

resulted in trades and originated from CAT Individual Customer accounts at one of the 58 MPIDs in the CAT 

retail analysis identified in Table 7 during March 2022. The distribution is calculated from all market and limit 

orders that originated from CAT Individual Customer accounts and resulted in a trade. Dollar values for limit 

orders were calculated based on the limit price of the order (limit price times shares in the order). Dollar values of 

market orders were calculated based on the far side NBBO quote at the time of order entry and then multiplying 

that by the number of shares in the order. The execution price was used in the rare instances when the NBBO 

wasn’t available. See supra Table 7 for details on how the broker-dealers were identified.  

A smaller threshold value would result in more segmented orders potentially being 

excepted from qualified auctions. Orders above this value and below $200,000 would be more 

likely to not be exposed in a qualified auction and would instead be more likely to be 

internalized by a wholesaler without the wholesaler being subject to competition at the individual 

order level. This may decrease price improvement offered to these orders compared to the 

Proposal. It would also reduce the chance that other market participants could interact with these 

individual investor orders, potentially increasing their transaction costs compared to the 

Proposal. However, it may also result in less of a reduction in wholesaler revenue compared to 

the Proposal, which may result in wholesalers not reducing PFOF as much. It may also increase 

the likelihood of wholesalers continuing to not charge retail brokers for their routing services. 

Both of these changes may also reduce the chance retail brokers would resume charging 

commissions compared to the Proposal.361 

 

 A larger threshold value would result in more individual investor orders potentially being 

included in qualified auctions. This could result in more individual investors orders over 

$200,000 receiving greater price improvement compared to the Proposal, because they would be 

more likely to be exposed in qualified auctions. However, this benefit may be limited, because 

the auctions may be less likely to attract sufficient liquidity to fill the entire order. 

 

 As another alternative, the Commission could create an additional exception to Proposed 

Rule 615 that would apply to all segmented orders that were classified as non-marketable limit 

orders at the time of order receipt. Proposed Rule 615 includes beyond-the-midpoint non-

marketable limit orders but exempts non-marketable limit orders with limit prices at and below 

the midpoint. Under this alternative, beyond-the-midpoint non-marketable limit orders that met 

the other criteria to be considered a segmented order would also be exempted from Proposed 

Rule 615. 

Table 24 below provides a break-down of the share of different order types for individual 

investors during Q1 2022. The data indicates that beyond-the-midpoint non-marketable orders 

only accounted for 1.9% of the executed dollar volume of orders individual investors routed to 

wholesalers.729 Furthermore, only 17.7% of the dollar volume in these orders were executed in a 

principle capacity, equaling 0.3% of total executed dollar volume.730 Thus, the share of non-

marketable limit orders that is currently isolated at the order-by-order level is an extremely small 

share of overall individual investor order flow.  

                                                
729  Over 95% of the executed dollar volume individual investors routed to wholesalers came from marketable 

orders.  

730  The majority of the executed dollar volume in beyond-the-midpoint non-marketable orders was executed in 

a riskless principal capacity or was rerouted and executed on an agency basis. 



362 

 

Table 24: Distribution of Individual Investor Order Types, Q1 2022 

Order Type 

Share of dollar trading 

volume 

(%) 

Marketable Order (% of total) 80.6% 

Marketable Orders - Principle Execution (% of total) 73.5% 

Principle Share % of Marketable Orders 91.1% 

   

Marketable Limit Orders (% of total) 14.7% 

Marketable Limit Orders - Principle Execution (% of total) 12.7% 

Principle Share % of Marketable Limit Orders 86.4% 

   

Beyond-the-Midpoint Non-Marketable Limit Orders (% of total) 1.9% 

Beyond-the-Midpoint Non-Marketable Limit Orders - Principle Execution (% of total) 0.3% 

Principle Share % of Beyond-the-Midpoint Non-Marketable Limit Orders  17.7% 

   

Midpoint or below Non-Marketable Limit Orders (mp and farside) (% of total) 2.8% 

Midpoint or below Non-Marketable Limit Orders (mp and farside) - Principle Execution (% of total) 0.3% 

Principle Share of Midpoint or below Non-Marketable Orders (mp and farside) 10.5% 

  

This table looks at the percentage of dollar trading volume in NMS stocks and ETFs of different market and limit (as measured 
by marketability) order types that were routed to wholesalers from the 58 broker-dealer MPIDs in the CAT retail analysis in Q1 

2022. See supra Table 7 for additional information on the sample.  

The analysis shows the order type’s percentage of dollar trading volume, i.e. the dollar trading volume belonging to a particular 

order type (out of the total dollar trading volume across all order types). The Principle Execution for an order type is the 

percentage of dollar trading volume executed in a principal capacity by a wholesaler belonging to a particular order type (out of 

the total dollar trading volume executed in a principal capacity by a wholesaler across all order types). The Principle Share %  

for a particular order type is the percentage of dollar trading volume that was executed by a wholesaler in a principal capacity 

(out of the total dollar trading volume in that order type). 

Marketability of a limit order was determined using the NBBO from the consolidated market data feed at the time the 

wholesaler received the order. Marketable limit orders are limit orders where the limit price is greater than or equal to the 

opposite side quote (NBB for sell orders and NBO for buy orders). Beyond-the-midpoint Non-marketable limit orders are limit 

orders with limit prices between the midpoint and the opposite side quote (NBB for sell orders and NBO for buy orders). 

Midpoint or below non-marketable limit orders are limit orders with limit prices between the midpoint and the same side quote.  

Given the small volume of beyond-the-midpoint non-marketable limit orders, the costs 

and benefits of this alternative could be similar to the Proposal. However, fewer beyond-the-

midpoint non-marketable limit orders would be submitted to qualified auctions. Instead, more of 



363 

 

them may be internalized or executed on a riskless principal basis, which may reduce the price 

improvement they receive relative to the Proposal.731 

 

 

 In addition to other requirements, the Proposal requires a trading center to have an 

average daily share volume of 1.0 percent or more of the aggregate average daily share volume 

for NMS stocks during at least four of the preceding 6 calendar months in order to qualify as an 

open competition trading center. As an alternative, the Commission could choose to require a 

higher or a lower percentage, including zero percent, of the average daily share volume in NMS 

stocks as the threshold to qualify as an open competition trading center. 

 If the threshold were higher, then fewer exchanges and ATSs would meet the definition 

of an open competition and be eligible to run qualified auctions. It could result in reduced 

competition between venues running qualified auctions. This may reduce innovation and, to the 

extent it occurs within the 5 mil fee and rebate caps, result in reduced competition between 

qualified auctions on the basis of access fees and rebates, which could increase the net capture 

rate open competition centers earn from their qualified auctions. However, the reduced number 

of qualified auctions could result in more liquidity suppliers competing in individual qualified 

auctions (i.e., there would be less fragmentation of liquidity suppliers across qualified auctions), 

which may provide more price improvement to segmented orders submitted to these auctions.  

                                                
731  Both the Proposal and this alternative would allow beyond-the-midpoint non-marketable limit orders to be 

routed to an exchange LOB instead of being submitted to qualified auctions. Therefore, this alternative may 

result in a similar portion of individual investor beyond-the-midpoint non-marketable limit orders being 

routed to exchange LOBs as under the Proposal. 



364 

 

 If the threshold were lower, more exchanges and ATSs would be able to meet the 

definition of an open market trading center and be able to operate qualified auctions. More 

exchanges and ATSs might operate qualified auctions, which could enhance competition 

between venues running qualified auctions. This could encourage more innovation in qualified 

auctions. For example, exchange groups may be more likely to run multiple qualified auctions on 

different exchanges with different structures, priority rules, or fees. It would also reduce the 

competitive disadvantage of exchanges and ATSs that would be too small to run qualified 

auctions under the Proposal but would be under this alternative. However, it may result in greater 

fragmentation of liquidity suppliers across different qualified auctions, which may reduce 

competition between liquidity suppliers in individual qualified auctions and reduce price 

improvement to segmented orders submitted to these auctions. Additionally, greater 

fragmentation in qualified auctions could increase the risk that a broker-dealer could route a 

segmented order to a qualified auction with less competition from other liquidity suppliers so 

that the routing broker-dealer may have a greater chance to trade with the segmented order. 

 

 As an alternative, the Commission could limit the definition of an open competition 

trading center to only include national securities exchanges. This alternative could be in 

combination with the 1% average daily share volume in NMS stocks that the Proposal specifies, 

or some other threshold (including no threshold) as discussed in section VII.D.5.a. This would 

mean that NMS Stock ATSs would not be able to operate qualified auctions. 

 Compared to the Proposal, this alternative would put NMS Stock ATSs at a competitive 

disadvantage to exchanges. NMS Stock ATSs that would have met the criteria to be considered 

open competition trading centers under the Proposal would be considered restricted trading 



365 

 

centers under this alternative and would not be able to execute segmented orders, unless it is via 

one of the exceptions.732 More segmented orders would be routed to qualified auctions on 

exchanges, which could lead to these exchanges attracting additional order flow and result in a 

greater share of orders being executed on exchanges. This could raise the barriers to entry for 

new NMS Stock ATSs and increase the chance that a smaller NMS Stock ATS exits the market. 

 However, relative to the Proposal, this alternative could result in increased investor 

protection. Because qualified auctions would be limited to being operated by national securities 

exchanges, proposed rule changes to all qualified auctions would be subject to notice, comment 

and Commission approval. This would give the Commission greater ability to review and 

disapprove qualified auctions designs to ensure they met standards of the Proposal, which may 

increase investor protection. 

 

 As an alternative, the Commission could choose to allow NMS Stock ATSs to qualify as 

open competition trading centers and be eligible to run qualified auctions without imposing the 

requirements of proposed Rule 600(b)(64)(ii). However, any average daily NMS stock volume 

threshold that would apply to exchanges for being able to run qualified auctions would also 

apply to NMS Stock ATSs.733 This would mean that the NMS Stock ATS would not be required 

to display quotes that are disseminated in consolidated market data, although it would still need 

to subscribe to the ADF so that its qualified auction messages are included in consolidated data. 

                                                
732  Under the Proposal, NMS stock ATSs operating qualified auctions may have had a competitive advantage 

over exchanges in the sense that they would have more flexibility in making changes to their qualified 

auctions, because their changes would not be subject to notice, comment, and Commission approval, like 

exchanges would. 

733  Either the proposed 1% average daily volume threshold or a higher or lower threshold (including zero 

percent) as discussed in supra section VII.D.5.a. 



366 

 

Additionally, if the NMS Stock ATS was not subject to the fair access requirements of Rule 

301(b)(5), then it would be allowed to limit subscriber access to its ATS and to its qualified 

auction mechanisms. However, the NMS Stock ATS’s qualified auction would still be limited by 

any of the qualified auction requirements, either proposed Rule 615(c) or one of the alternatives 

discussed in section VII.D.3. 

 This alternative would make it easier for an NMS Stock ATS to operate a qualified 

auction and result in more NMS Stock ATSs operating qualified auctions compared to the 

Proposal. On the one hand, this could enhance competition between venues running qualified 

auctions and encourage more innovation in qualified auctions. However, NMS Stock ATSs 

operating qualified auctions would have a greater competitive advantage over exchanges. 

Compared to exchanges, they could limit access to their platform and the market participants that 

would be eligible to participate in qualified auctions.734 Although they would have to charge the 

same fees and rebates to all bidders in the qualified auctions, they would have more flexibility in 

bundling other aspects of their ATS or services to give an advantage to some subscribers over 

others, which may allow these subscribers an indirect advantage in bidding in qualified auctions. 

This may limit competition among liquidity suppliers in these qualified auctions. NMS Stock 

ATSs that operate qualified auctions may also be a more attractive destination for some broker-

dealers to route segmented orders because they may give the broker-dealer routing the order an 

increased chance of being able to trade with the segmented order compared to qualified auctions 

operated by exchanges. These competitive advantages of NMS Stock ATSs operating qualified 

                                                
734  Additionally, NMS stock ATSs would have more flexibility in making changes to their qualified auctions, 

because their changes would not be subject to notice, comment, and Commission approval, like exchanges 

would. 



367 

 

auctions may limit the incentives for exchanges to operate qualified auctions, which could reduce 

competition between venues running qualified auctions. 

 

 As an alternative, the Commission could establish a new information barrier rule 

specifying new policies and procedures for wholesalers that must be part of the policies and 

procedures for protecting material, non-public information that Exchange Act Section 15(g) 

requires of all broker-dealers. The new rule would require wholesalers to not share information 

on customer order flow, either on individual orders or in aggregate, outside of the wholesaler 

business functions that were responsible for the handling and execution of the customer orders. 

This would prevent wholesalers from sharing this information with other business units and 

affiliates that may engage in proprietary trading or other business functions not related to the 

handling or execution of the customer order. The rule particularly would focus on assuring that 

customer order information is not used in a way that would detract from the interests of 

customers in obtaining best execution of their orders.  

 A wholesaler information barrier rule would result in greater protection of customer order 

information at wholesalers, which would improve investor protection. It may also improve 

customer order execution quality by reducing the chance that another trader will be able to use 

customer order information to trade ahead of or adjust liquidity to disadvantage the customer 

order. This rule may reduce the profits of other wholesaler lines of business or affiliates that may 

have benefited from customer order information. This may reduce the incentives for wholesalers 

to handle individual investor orders, which may reduce the amount of price improvement they 

offer to individual investor orders or the PFOF they pay to retail brokers. To the extent that the 

use of this information by other wholesaler business lines increases information asymmetries and 



368 

 

adverse selection risk for other market participants, the rule may reduce adverse selection risk 

faced by other liquidity providers, which could improve market quality.  

 

 As an alternative the Commission could allow national securities exchanges to display 

the price and size of quotes in their RLP programs on their proprietary feeds and in the 

consolidated market data feed. Under this alternative, exchanges would not execute as large a 

share of marketable individual investor orders as under the Proposal. Instead, the majority of 

marketable individual investor orders would still be internalized by wholesalers. This would 

occur because liquidity providers quoting in exchange RLP programs would not know the 

identity of the retail broker of the marketable individual investor orders they are trading against. 

Therefore, they would usually need to set their quotes in the RLP programs wider to account for 

the risk of trading with individual investor order flow that imposed greater adverse selection risk. 

However, wholesalers would know the identity of the retail broker of the order they were 

handling. This means wholesalers could avoid internalizing individual investor order flow that 

posed greater adverse selection risk and give greater price improvement to individual investor 

orders with less adverse selection risk. 

On average, marketable individual investor orders would receive less price improvement 

under this alternative than the Proposal because wholesalers would not need to compete on an 

order by order basis when they internalize an individual investor order. Institutional investor 

transaction costs would also be higher than under the Proposal because they would not be able to 

trade with marketable individual investor orders as frequently. A lack of order-by-order 

competition would also allow wholesalers to pay more PFOF to retail brokers than under the 

proposal, since wholesalers would be able to internalize order flow at more profitable spreads 

relative to those that would emerge under qualified auctions. From this increased profitability, 



369 

 

wholesalers would be able to pay more PFOF. Increased PFOF revenue would reduce the 

incentive for broker-dealers to generate new revenue lines or expand existing revenue lines. 

Therefore, under this alternative there would not be as significant a change in retail broker 

business models.  

Compared to the baseline, there would be greater transparency in the liquidity available 

to the marketable orders of individual investors. This could increase competition between 

exchange RLPs and wholesalers for the execution of individual investor marketable orders and 

result in more individual investor orders being executed in exchange RLPs (although the 

majority of individual investor orders would still likely be internalized by wholesalers). Because 

broker-dealers would be able to see the displayed quotes in RLPs, when marketable orders of 

individual investors are routed to execute in RLPs, it may be because the quoted prices in the 

RLP were better than the prices the wholesaler would have been willing to internalize the 

individual investor order at. Additionally, the increase in competition may result in wholesalers 

offering more price improvement to the marketable orders of individual investors to attract order 

flow from retail brokers. Both of these effects may result in lower trading costs for marketable 

orders of individual investors compared to the baseline. However, if wholesalers earn lower 

marginal profits from internalizing the orders of individual investors, they may reduce the 

amount of PFOF they pay to retail brokers that accept PFOF, which could indirectly get passed 

through to the retail brokers’ customers in the form of reduced services or an increased risk of 

the retail broker charging commissions. 

 

 As an alternative, in addition to displaying quotes in RLPs, the Commission could 

introduce a new, smaller-sized benchmark from the NBBO for segmented orders. The new 

benchmark would be called the Retail Best Bid and Offer (“RBBO”). It would be constructed 



370 

 

similar to the NBBO, but the threshold for determining when an exchange’s quotes qualified for 

the RBBO would be based on a $500 notional value. It would also incorporate information from 

smaller odd lot quotations and quotes from exchange RLPs, which would be aggregated up 

across multiple price levels by individual exchanges until they exceeded a value of $500 or 

greater. The least aggressive price level from this aggregation would be sent to the SIP for the 

purposes of determining the RBBO. The RBBO would be a protected quote for the purposes of 

executing segmented orders and would also be added as a benchmark in Rule 605 reports for 

calculating price improvements statistics for segmented orders. 

Compared to the Proposal, this alternative would result in wholesalers internalizing a 

larger share of marketable orders of individual investors and fewer such orders being executed 

on exchanges. Although quotes in RLPs and smaller odd-lot quotes would be protected with 

respect to segmented orders, liquidity providers quoting in exchange RLPs would usually need to 

set their quotes in the RLPs wider than the prices at which wholesalers might internalize 

individual investor orders to account for the risk of trading with individual investor order flow 

that imposed greater adverse selection risk.735 

On average, marketable orders of individual investors would receive less price 

improvement under this alternative than the Proposal because wholesalers would not need to 

compete on an order by order basis when they internalize an individual investor order. 

Institutional investor trading costs would also be higher than under the Proposal because they 

would not be able to trade with marketable orders of individual investors as frequently. A lack of 

order by order competition would also allow wholesalers to pay more PFOF to retail brokers 

                                                
735  Wholesalers would still know the identity of the retail broker whose orders they internalize. Compared to 

liquidity suppliers in exchange RLP programs, they would likely be able to further sub-segment individual 

investor order flow when considering how much price improvement to offer. 



371 

 

than under the Proposal. Therefore, there would not be as significant improvements in retail 

broker business models. 

However, compared to the baseline, there would be more price improvement and lower 

trading costs for marketable orders of individual investors. This would occur because 

wholesalers would need to offer price improvement against a tighter benchmark in order to 

internalize a segmented order. The disclosure of price improvement against the NBBO in Rule 

605 reports might also enhance competition among wholesalers to offer greater price 

improvement in order to attract more order flow from retail brokers. 

 

Instead of requiring that segmented orders be routed to qualified auctions, the 

Commission could require that execution quality information concerning an individual investor’s 

order be disclosed on their transaction confirmations. Specifically, under this alternative retail 

brokers would be required to disclose information on the number of shares executed, the price 

improvement relative to the NBBO, the effective-to-quoted spread ratio, and time to execution. 

This information would be provided along with the confirmation of each trade to the customer 

who had placed the order, enhancing transparency on each individual investor’s own execution 

quality. 

The Commission believes that this disclosure would not significantly increase 

transparency regarding how execution quality varies across retail brokers for two reasons. First, 

reflecting their small scale of trading activity, most individual investors rely on a single retail 

broker that executes orders on their behalf. As such, most customers would never have a chance 

to compare the execution quality of their trades via a given retail broker to similar executions at 

another retail broker. Second, even if a customer used services of more than one retail broker 

contemporaneously, the small sample of that individual investor’s execution quality metrics as 



372 

 

well as differences between the orders of the customer that were handled by different retail 

brokers may lead to misleading inferences about execution quality differences across brokers. 

The Commission also believes that the benefits of this alternative are limited relative to 

the Proposal because marketable individual investor orders would remain mostly isolated, i.e., 

mostly executed by the wholesaler handling these orders. A lack of interaction with trading 

interest from other market participants would prevent the execution quality improvements that 

would otherwise obtain under the Proposal. As such, there would be less of an increase in price 

improvement (and reduction in transaction costs) for individual investors compared to the 

Proposal. Additionally, compared to the Proposal, this alternative would not provide other 

market participants, including institutional investors, as great a chance to directly interact with 

order flow from individual investors, which may result in institutional investors receiving worse 

order execution quality compared to the Proposal. 

E. Request for Comments 

The Commission requests comment on all aspects of this initial economic analysis, 

including whether the analysis has: (1) identified all benefits and costs, including all effects on 

efficiency, competition, and capital formation; (2) given due consideration to each benefit and 

cost, including each effect on efficiency, competition, and capital formation; and (3) identified 

and considered reasonable alternatives to the proposed new rules and rule amendments. The 

Commission requests and encourages any interested person to submit comments regarding the 

proposed rules, the Commission’s analysis of the potential effects of the proposed rules and 

proposed amendments, and other matters that may have an effect on the proposed rules. The 

Commission requests that commenters identify sources of data and information as well as 

provide data and information to assist us in analyzing the economic consequences of the 



373 

 

proposed rules and proposed amendments. The Commission also is interested in comments on 

the qualitative benefits and costs identified and any benefits and costs that may have been 

overlooked. In addition to our general request for comments on the economic analysis associated 

with the proposed rules and proposed amendments, the Commission requests specific comment 

on certain aspects of the proposal: 

38. Do commenters believe the Commission has adequately described the market failures due 

to the existing structure of U.S. stock markets? Why or why not?  

39. Do commenters agree with the Commission’s qualitative and quantitative baseline 

descriptions of the structure of trading for NMS stocks, including trading service, broker 

services, and access to market centers? Why or why not? 

40. Do commenters agree with the Commission’s qualitative and quantitative baseline 

descriptions of order routing behavior of retail brokers? Why, or why not? 

41. Do commenters agree with the Commission’s assessment of execution quality and fill 

rates of individual investor orders in NMS stocks? Why, or why not? 

42. Do commenters agree with the Commission’s assessment of brokers’ handling of 

fractional individual investor orders? Why or why not? 

43. Do commenters agree with the Commission’s characterization of individual investor 

order flow segmentation by wholesalers? Why, or why not? 

44. Do commenters agree with the Commission’s characterization of the interaction between 

wholesalers and institutional investors? Please explain why, or why not? 

45. Do commenters agree with the Commission’s description of market making expenses of 

wholesalers? What other types of such market making costs should be considered? Please 

provide conceptual and quantitative context. 



374 

 

46. Do commenters agree with the Commission’s description of the trade-off between PFOF 

and execution quality of individual investor orders faced by PFOF receiving retail 

brokers, driven by the business models of these brokers and the wholesalers who offer 

PFOF? Why, or why not? 

47. Do commenters agree with the Commission’s descriptions of different aspects of retail 

brokers’ business models? Why, or why not? 

48. Do commenters agree the Commission’s assessment of conflict of interests on the parts 

of wholesalers and PFOF receiving brokers? Please explain your reasoning. 

49. Do commenters agree with the Commission’s assessment of the impacts of such conflicts 

of interest on the execution quality of individual investor orders? Why or why not? 

50.  Do commenters agree with the Commission that a lack of order-by-order competition is 

a key missing component in the individual investor order execution process? Please 

explain why or why not.  

51. Do commenters agree with Commission’s assessment that retail brokers’ use of past 

execution quality metrics to determine the allocation of current individual investor order 

flow across wholesalers may lead to poor execution quality for some individual investor 

orders? Why or why not? 

52. Do commenters agree with the Commission that the existing execution practices for 

individual investor orders makes the portion of individual investor order flow with the 

least adverse selection risk inaccessible to other market participants, including 

institutional investors? Please explain why or why not. 

53. Do commenters agree with the Commission’s assessment that the ability of wholesalers 

to choose which orders to internalize and which ones to allow to interact with trading 



375 

 

interest with other market participants places wholesalers at a competitive advantage? 

Why or why not? 

54. Do commenters agree that the proposed Rule would improve competition, including in 

the market for trading service and the market for broker-dealer services? Why or why 

not? 

55. Do you agree with the Commission that the proposed Rule would lower trading costs to 

individual and institutional investors, enhance individual investor order execution quality 

and price discovery, and improve efficiency in the operations of retail brokers? Please 

explain why or why not? 

56.  Does the Economic Analysis in this release account for all compliance costs? If not, 

what other compliance cost would market participants or exchanges incur? Please 

provide estimates of the additional compliance costs that you believe should be 

considered. 

57. Does the Economic Analysis in this release account for all relevant costs? If not, which 

other costs should the economic analysis consider? Please provide estimates of additional 

costs, other than compliance costs, that you believe should be considered. 

58. Do commenters agree with the Commission’s assessment of how the Proposed Rule 

would impact efficiency and capital formation? Why, or why not? Please explain. 

59. Do commenters agree with the Commission’s analysis of the benefits and costs of the 

reasonable alternatives to the Proposed Rule? Why, or why not? Please explain. 

60. Are there any additional reasonable alternatives the Commission should consider? If so, 

please describe that alternative and provide the benefits and costs of that alternative 

relative to the baseline and to the proposed Rule. 



376 

 

61. Should the Commission specify a minimum set of auction standards as part of the 

reasonable alternative to allow open competition trading centers more flexibility in 

designing qualified auctions? If so, what minimum set of auction standards should the 

Commission specify and why? Please explain. What would be the costs and benefits or 

other economic effects of specifying this minimum set of auctions standards? Should the 

Commission specify a minimum auction duration as part of this alternative? Why or why 

not? If so, what minimum auction duration should the Commission specify? Please 

explain and provide as much analysis and discussion as possible. Should the Commission 

specify that execution priority shall not be based on time of receipt of the auction 

response as part of this alternative? Why or why not? Please explain.  

62. Instead of requiring the consolidated tapes to amend their plans to include qualified 

auction messages, should the Commission accelerate the inclusion of all auction 

information in NMS data from the MDI Rules? What would be the costs and benefits or 

other economic effects of accelerating the inclusion of all auction information in NMS 

data? How would such an acceleration impact eventual competition among competing 

consolidators or the realization of the anticipated costs and benefits of the MDI Rules? 

Please explain. 

VIII. Regulatory Flexibility Act Certification 

The Regulatory Flexibility Act (“RFA”)736 requires Federal agencies, in promulgating 

rules, to consider the impact of those rules on small entities. Section 603(a) of the Administrative 

Procedure Act,737 as amended by the RFA, generally requires the Commission to undertake an 

                                                
736  5 U.S.C. 601 et seq. 

737  5 U.S.C. 603(a). 



377 

 

initial regulatory flexibility analysis of the impact of the proposed rule amendments on “small 

entities.”738 Section 605(b) of the RFA states that this requirement shall not apply to any 

proposed rule or proposed rule amendment which, if adopted, would not have a significant 

impact on a substantial number of small entities.739  

Certification for Proposed Rule 615 and the related amendments.  

Proposed Rule 615 and the proposed related amendments are discussed in detail in 

section IV (Description of Proposed Rule 615) above. The economic impact, including the 

estimated compliance costs and burdens, of Proposed Rule 615 are discussed in section VI 

(Paperwork Reduction Act Analysis) and section VII (Economic Analysis). As discussed above 

in those sections, Proposed Rule 615 and the proposed related amendments would have an 

impact on certain broker-dealers, NMS Stock ATSs, national securities exchanges, and national 

securities associations.  

Impact on Broker-Dealers 

Although section 601(b) of the RFA defines the term “small business,” as stated above, 

the statute permits agencies to formulate their own definitions, and for purposes of Commission 

rulemaking in connection with the RFA, a small business includes a broker or dealer that: (1) had 

total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior 

fiscal year as of which its audited financial statements were prepared pursuant to Rule 17a-5(d) 

under the Exchange Act,740 or, if not required to file such statements, a broker-dealer with total 

                                                
738  Although section 601(b) of the RFA defines the term “small entity,” the statute permits agencies to 

formulate their own definitions. The Commission has adopted definitions for the term “small entity” for the 

purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this 

proposed rulemaking, are set forth in Rule 0-10 under the Exchange Act, 17 CFR 240.0-10. 

739  5 U.S.C. 605(b). 

740  17 CFR 240.17a-5(d). 



378 

 

capital (net worth plus subordinated liabilities) of less than $500,000 on the last day of the 

preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not 

affiliated with any person (other than a natural person) that is not a small business or small 

organization.741 Applying this test and based on a review of data relating to broker-dealers,742 the 

Commission estimates, as discussed below, that of the 3,498 broker-dealers, there are only 4 that 

would be “small entities” and also in the scope of Proposed Rule 615. 

Proposed Rule 615(a) would apply to any restricted competition center that executes 

internally segmented orders in NMS stocks. Restricted competition trading centers would include 

NMS Stock ATSs that do not meet the definition of open competition trading center, and, with 

the exception of national securities exchanges, any other trading center that executes segmented 

orders, which would include certain broker-dealers. The Commission has identified no broker-

dealers that likely execute internally orders for customer accounts that would be “small entities.” 

Proposed Rule 615 and the related amendments would also apply to any broker or dealer 

that could potentially handle segmented orders. As discussed in section VI, this would include 

the 157 broker-dealers that the Commission has identified that carry customer accounts, and 

would be in the scope of Proposed Rule 615. Of these, the Commission has identified 1 that may 

be a “small entity.” Also as discussed in section VI, the Commission has identified 25 broker-

                                                
741  See 17 CFR 240.0–10(c); see also 17 CFR 240.0-10(i) (providing that a broker or dealer is affiliated with 

another person if: such broker or dealer controls, is controlled by, or is under common control with such 

other person; a person shall be deemed to control another person if that person has the right to vote 25% or 

more of the voting securities of such other person or is entitled to receive 25% or more of the net profits of 

such other person or is otherwise able to direct or cause the direction of the management or policies of such 

other person; or such broker or dealer introduces transactions in securities, other than registered investment 

company securities or interests or participations in insurance company separate accounts, to such other 

person, or introduces accounts of customers or other brokers or dealers, other than accounts that hold only 

registered investment company securities or interests or participations in insurance company separate 

accounts, to such other person that carries accounts on a fully disclosed basis). 

742  The Commission considered FOCUS data and information about broker-dealers made publicly available by 

FINRA through reports available at https://brokercheck.finra.org/. 

https://brokercheck.finra.org/


379 

 

dealers that may fall within the scope of Proposed Rule 615 because, although they report that do 

not carry customer accounts, they report that they do effect public customer transactions in 

equity securities on a national securities exchange or OTC and likely are acting as “executing 

brokers.” Of these, the Commission has identified 3 that may potentially be engaged in lines of 

business that would make them within the scope of Proposed Rule 615 and that may also be 

“small entities.” Finally, as discussed in section VI, the Commission has identified 1,267 broker-

dealers that would likely be “originating brokers” with responsibility for monitoring customer 

accounts that could potentially fall within the scope of Proposed Rule 615. Of these, however, 

the Commission concludes that none of the approximately 20 broker-dealers that the 

Commission estimates would fall within the scope of Proposed Rule 615, because they may 

make the certification referred to in paragraph (c)(1) of Proposed Rule 615,743 would be “small 

entities.” 

Impact on National Securities Exchanges, National Securities Associations, and NMS Stock 

ATSs 

Also as discussed above in sections IV, VI and VII, Proposed Rule 615 and the proposed 

related amendments would impose requirements on national securities exchanges, national 

securities associations, and NMS Stock ATSs. With respect to national securities exchanges, the 

Commission’s definition of a small entity is an exchange that has been exempt from the 

reporting requirements of Rule 601 of Regulation NMS, and is not affiliated with any person 

                                                
743  Supra section VI.C.3 (discussing which broker-dealers would likely certify that they established, 

maintained, and enforced policies and procedures reasonably designed to assure that the identity of the 

originating broker will not be disclosed, directly or indirectly, to any person that potentially could 

participate in the qualified auction or otherwise trade with the segmented order). 



380 

 

(other than a natural person) that is not a small business or small organization.744 Applying this 

test, no national securities exchange is a small entity. The only national securities association, is 

also not a “small entity.”745 

With respect to NMS Stock ATSs, all ATSs, including NMS Stock ATSs, are required to 

register as broker-dealers.746 The Commission examined recent FOCUS data for the broker-

dealers that operate the 32 NMS Stock ATSs and applying the test for broker-dealers described 

above747 believes that none of the NMS Stock ATSs currently trading were operated by a broker-

dealer that is a “small entity.” 

For the above reasons, the Commission certifies that Proposed Rule 615 and the proposed 

related amendments would not have a significant economic impact on a substantial number of 

small entities for purposes of the RFA.  

The Commission requests written comments regarding this certification. The 

Commission invites commenters to address whether the proposed rules would have a significant 

impact on a substantial number of small entities, and requests that commenters describe the 

                                                
744  See 17 CFR 240.0-10(e) (providing that when used with reference to an exchange, means any exchange 

that: (1) has been exempted from the reporting requirements of Rule 601; and (2) is not affiliated with any 

person (other than a natural person) that is not a small business or small organization); see also 17 CFR 

240.0-10(i) (providing that a person is affiliated with another person if that person controls, is controlled 

by, or is under common control with such other person; and a person shall be deemed to control another 

person if that person has the right to vote 25% or more of the voting securities of such other person or is 

entitled to receive 25% or more of the net profits of such other person or is otherwise able to direct or cause 

the direction of the management or policies of such other person). 

745  See 13 CFR 121.201. 

746  Rule 301(b)(1) of Regulation ATS. Also, while a national securities exchanges can operate an ATS, subject 

to certain conditions, such an ATS would have to be registered as a broker-dealer. See Regulation ATS 

Adopting Release, supra note 27, at 70891. Currently, no national securities exchange operates an ATS that 

trades NMS stocks. 

747  Supra note 741 and accompanying text. 

https://www.law.cornell.edu/cfr/text/17/242.601
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nature of any impact on small entities and provide empirical data to support the extent of the 

impact. 

IX. Consideration of Impact on the Economy 

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or 

“SBREFA,”748 the Commission must advise OMB whether a proposed regulation constitutes a 

“major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results in or is 

likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major 

increase in costs or prices for consumers or individual industries; or (3) significant adverse 

effects on competition, investment, or innovation. The Commission requests comment on the 

potential effect of the proposed amendments on the U.S. economy on an annual basis; any 

potential increase in costs or prices for consumers or individual industries; and any potential 

effect on competition, investment, or innovation. Commenters are requested to provide empirical 

data and other factual support for their views to the extent possible. 

Statutory Authority 

Pursuant to the Exchange Act (15 U.S.C. 78a et seq.), and particularly sections 3(b), 5, 6, 

11A, 15, 15C, 17(a), 17(b), 19, 23(a), and 36 thereof (15 U.S.C. 78c(b), 78e, 78f, 78k-1, 78o, 

78o-5, 78q(a), 78q(b), 78s, 78w(a), and 78mm), the Commission proposes to amend parts 240 

and 242 of chapter II of title 17 of the Code of Federal Regulations as follows:  

List of Subjects  

17 CFR Parts 240 and 242 

 Brokers, Reporting and recordkeeping requirements, Securities. 

Text of the Proposed Rule and Amendments 

                                                
748  Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a 

note to 5 U.S.C. 601). 



382 

 

For the reasons stated in the preamble, the Commission is proposing to amend title 17, 

chapter II of the Code of Federal Regulations: 

PART 240 – GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE 

ACT of 1934 

 1. The general authority citation for part 240 continues to read as follows: 

 Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 

77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 

78o, 78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 80a-20, 80a-23, 

80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 

5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, 

sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. 

 * * * * * 

§ 240.3a51-1 [Amended] 

 2. Amend § 240.3a51-1 by, in paragraph (a), removing the text “§ 242.600(b)(55)” and 

adding in its place “§ 242.600(b)(58)”. 

§ 240.13h-1 [Amended] 

3. Amend § 240.13h-1 by, in paragraph (a)(5), removing the text “§ 242.600(b)(54)” and 

adding in its place “§ 242.600(b)(57)”. 

PART 242–REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER 

MARGIN REQUIREMENTS FOR SECURITY FUTURES  

4. The authority for part 242 continues to read as follows: 



383 

 

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 

78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-

29, and 80a-37. 

§242.105 [Amended] 

5. Amend § 242.105 by: 

a. In paragraph (b)(1)(i)(C), removing the text “§ 242.600(b)(30)” and adding in its place 

“§ 242.600(b)(33)”. 

b. In paragraph (b)(1)(ii), removing the text “§ 242.600(b)(77)” and adding in its place “§ 

242.600(b)(84)”. 

§ 242.201 [Amended] 

6. Amend § 242.201 by: 

a. In paragraph (a)(1), removing the text “§ 242.600(b)(55)” and adding in its place “§ 

242.600(b)(58)”. 

b. In paragraph (a)(2), removing the text “§ 242.600(b)(30)” and adding in its place “§ 

242.600(b)(33)”. 

c. In paragraph (a)(3), removing the text “§ 242.600(b)(68)” and adding in its place “§ 

242.600(b)(74)”. 

d. In paragraph (a)(4), removing the text “§ 242.600(b)(50)” and adding in its place “§ 

242.600(b)(53)”. 

e. In paragraph (a)(5), removing the text “§ 242.600(b)(58)” and adding in its place “§ 

242.600(b)(62)”. 

f. In paragraph (a)(6), removing the text “§ 242.600(b)(67)” and adding in its place “§ 

242.600(b)(73)”. 



384 

 

g. In paragraph (a)(7), removing the text “§ 242.600(b)(77)” and adding in its place “§ 

242.600(b)(84)”. 

h. In paragraph (a)(9), removing the text “§ 242.600(b)(95)” and adding in its place “§ 

242.600(b)(105)”. 

§ 242.204 [Amended] 

7. Amend § 242.204 by: 

a. In paragraph (g)(2), removing the text Ҥ 242.600(b)(77) (Rule 600(b)(77) of 

Regulation NMS)” and adding in its place “§ 242.600(b)(84) (Rule 600(b)(84) of Regulation 

NMS)”. 

8. Amend § 242.600 by: 

a. In paragraph (b) introductory text, removing the text “(§§ 242.600 through 242.612)” 

and adding in its place “(§§ 242.600 through 242.615)”; 

b. Redesignating paragraphs (b)(3) through (100) as follows: 

Old paragraph New paragraph 

(b)(3) (b)(4) 

(b)(4) (b)(5) 

(b)(5) (b)(6) 

(b)(6) (b)(7) 

(b)(7) (b)(8) 

(b)(8) (b)(9) 

(b)(9) (b)(10) 

(b)(10) (b)(11) 

(b)(11) (b)(12) 

(b)(12) (b)(13) 

(b)(13) (b)(14) 

(b)(14) (b)(15) 



385 

 

(b)(15) (b)(16) 

(b)(16) (b)(17) 

(b)(17) (b)(18) 

(b)(18) (b)(19) 

(b)(19) (b)(20) 

(b)(20) (b)(21) 

(b)(21) (b)(24) 

(b)(22) (b)(25) 

(b)(23) (b)(26) 

(b)(24) (b)(27) 

(b)(25) (b)(28) 

(b)(26) (b)(29) 

(b)(27) (b)(30) 

(b)(28) (b)(31) 

(b)(29) (b)(32) 

(b)(30) (b)(33) 

(b)(31) (b)(34) 

(b)(32) (b)(35) 

(b)(33) (b)(36) 

(b)(34) (b)(37) 

(b)(35) (b)(38) 

(b)(36) (b)(39) 

(b)(37) (b)(40) 

(b)(38) (b)(41) 

(b)(39) (b)(42) 

(b)(40) (b)(43) 

(b)(41) (b)(44) 

(b)(42) (b)(45) 

(b)(43) (b)(46) 

(b)(44) (b)(47) 



386 

 

(b)(45) (b)(48) 

(b)(46) (b)(49) 

(b)(47) (b)(50) 

(b)(48) (b)(51) 

(b)(49) (b)(52) 

(b)(50) (b)(53) 

(b)(51) (b)(54) 

(b)(52) (b)(55) 

(b)(53) (b)(56) 

(b)(54) (b)(57) 

(b)(55) (b)(58) 

(b)(56) (b)(60) 

(b)(57) (b)(61) 

(b)(58) (b)(62) 

(b)(59) (b)(63) 

(b)(60) (b)(65) 

(b)(61) (b)(66) 

(b)(62) (b)(67) 

(b)(63) (b)(68) 

(b)(64) (b)(70) 

(b)(65) (b)(71) 

(b)(66) (b)(72) 

(b)(67) (b)(73) 

(b)(68) (b)(74) 

(b)(69) (b)(75) 

(b)(70) (b)(76) 

(b)(71) (b)(77) 

(b)(72) (b)(78) 

(b)(73) (b)(79) 

(b)(74) (b)(80) 



387 

 

(b)(75) (b)(82) 

(b)(76) (b)(83) 

(b)(77) (b)(84) 

(b)(78) (b)(85) 

(b)(79) (b)(86) 

(b)(80) (b)(88) 

(b)(81) (b)(89) 

(b)(82) (b)(90) 

(b)(83) (b)(92) 

(b)(84) (b)(93) 

(b)(85) (b)(94) 

(b)(86) (b)(95) 

(b)(87) (b)(96) 

(b)(88) (b)(97) 

(b)(89) (b)(98) 

(b)(90) (b)(99) 

(b)(91) (b)(101) 

(b)(92) (b)(102) 

(b)(93) (b)(103) 

(b)(94) (b)(104) 

(b)(95) (b)(105) 

(b)(96) (b)(106) 

(b)(97) (b)(107) 

(b)(98) (b)(108) 

(b)(99) (b)(109) 

(b)(100) (b)(110) 

 

c. Adding new paragraphs (b)(3), (b)(22), (b)(23), (b)(59), (b)(64), (b)(69), (b)(81), 

(b)(87), (b)(91), and (b)(100). 



388 

 

The additions read as follows: 

§ 242.600 NMS security designation and definitions. 

 * * * * * 

 (b) * * *  

 (3) Affiliate means, with respect to a specified person, any person that, directly or 

indirectly, controls, is under common control with, or is controlled by, the specified person. 

 * * * * * 

 (22) Continuous order book means a system that allows orders for NMS stocks to be 

accepted and executed on a continuous basis. 

 (23) Control means the power, directly or indirectly, to direct the management or policies 

of a broker, dealer, or open competition trading center, whether through ownership of securities, 

by contract, or otherwise. A person is presumed to control a broker, dealer, or open competition 

trading center if that person:  

 (i) Is a director, general partner, or officer exercising executive responsibility (or having 

similar status or performing similar functions);  

 (ii) Directly or indirectly has the right to vote 25 percent or more of a class of voting 

securities or has the power to sell or direct the sale of 25 percent or more of a class of voting 

securities of the broker, dealer, or open competition trading center; or  

 (iii) In the case of a partnership, has contributed, or has the right to receive upon 

dissolution, 25 percent or more of the capital of the broker, dealer, or open competition trading 

center. 

 * * * * * 

 (59) NMS Stock ATS has the meaning provided in § 242.300(k). 



389 

 

 * * * * * 

 (64) Open competition trading center means either: 

(i) A national securities exchange that: 

(A) Operates an SRO trading facility that is an automated trading center and displays 

automated quotations that are disseminated in consolidated market data pursuant to § 242.603(b); 

(B) Provides transaction reports identifying the national securities exchange as the venue 

of execution that are disseminated in consolidated market data pursuant to § 242.603(b); 

(C) During at least four of the preceding 6 calendar months, had an average daily share 

volume of 1.0 percent or more of the aggregate average daily share volume for NMS stocks as 

reported by an effective transaction reporting plan; and 

(D) Operates pursuant to its own rules providing that the national securities exchange will 

comply with the requirements of § 242.615(c) for a qualified auction; or 

(ii) An NMS Stock ATS that: 

(A) Displays quotations through an SRO display-only facility in compliance with § 

242.610(b); 

(B) Operates as an automated trading center and displays automated quotations that are 

disseminated in consolidated market data pursuant to § 242.603(b); 

(C) Provides transaction reports identifying the NMS Stock ATS as the venue of 

execution that are disseminated in consolidated market data pursuant to § 242.603(b); 

(D) Permits any registered broker or dealer to become a subscriber of the NMS Stock 

ATS; provided, however, the NMS Stock ATS: 

(1) Shall not permit any registered broker or dealer subject to a statutory disqualification 

to be or become a subscriber; and 



390 

 

(2) May, pursuant to written policies and procedures, prohibit any registered broker or 

dealer from being or becoming a subscriber, or impose conditions upon such a subscriber, that 

does not meet the standards of financial responsibility or operational capability as are prescribed 

by such written policies and procedures; 

(E) Provides equal access among all subscribers of the NMS Stock ATS and the 

registered broker-dealer of the NMS Stock ATS to all services that are related to: 

(1) A qualified auction operated by the NMS Stock ATS under § 242.615(c); and 

(2) Any continuous order book operated by the NMS Stock ATS; 

(F) During at least four of the preceding six calendar months, had an average daily share 

volume of 1.0 percent or more of the aggregate average daily share volume for NMS stocks as 

reported by an effective transaction reporting plan; and 

(G) Operates pursuant to an effective Form ATS-N under § 242.304, and such Form 

ATS-N evidences compliance by the NMS Stock ATS with the requirements of § 242.615(c) for 

a qualified auction and with the provisions of paragraphs (b)(64)(ii)(A) through (b)(64)(ii)(F) of 

this section. 

 * * * * * 

 (69) Originating broker means any broker with responsibility for handling a customer 

account, including, but not limited to, opening and monitoring the customer account and 

accepting and transmitting orders for the customer account. 

 * * * * * 

 (81) Qualified auction means an auction that is operated by an open competition trading 

center pursuant to § 242.615(c). 

 * * * * * 



391 

 

 (87) Restricted competition trading center means any trading center that is not an open 

competition trading center and is not a national securities exchange. 

 * * * * *  

 (91) Segmented order means an order for an NMS stock that is for an account: 

(i) Of a natural person or an account held in legal form on behalf of a natural person or 

group of related family members; and 

(ii) In which the average daily number of trades executed in NMS stocks was less than 40 

in each of the six preceding calendar months. 

(iii) For purposes of this paragraph (b)(91), group of related family members means a 

group of natural persons with any of the following relationships: child, stepchild, grandchild, 

great grandchild, parent, stepparent, grandparent, great grandparent, domestic partner, spouse, 

sibling, stepbrother, stepsister, niece, nephew, aunt, uncle, mother-in-law, father-in-law, son-in-

law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive and foster 

relationships; and any other natural person (other than a tenant or employee) sharing a household 

with any of the foregoing natural persons. 

* * * * * 

(100) Subscriber has the meaning provided in § 242.300(b). 

* * * * *  

§ 242.602 [Amended] 

9. Amend § 242.602 by, in paragraphs (a)(5)(i) and (ii), removing the text “§ 

242.600(b)(90)” and adding in its place “§ 242.600(b)(99)”. 

§ 242.611 [Amended] 



392 

 

10. Amend § 242.611 by, in paragraph (c), removing the text “§ 242.600(b)(38)” and 

adding in its place “§ 242.600(b)(41)”. 

§ 242.614 [Amended] 

11. Amend § 242.614 by, in paragraphs (d)(1), (2), and (3), removing the text “§ 

242.600(b)(20)” and adding in its place “§ 242.600(b)(21)”. 

12. Add § 242.615 to read as follows: 

§ 242.615 Order competition rule. 

(a) Order competition requirement. A restricted competition trading center shall not 

execute internally a segmented order for an NMS stock until after a broker or dealer has exposed 

such order to competition at a specified limit price in a qualified auction that meets the 

requirements of paragraph (c) of this section and is operated by an open competition trading 

center. If the segmented order is not executed in the qualified auction, a restricted competition 

trading center may, as soon as reasonably possible, execute the segmented order internally at a 

price that is equal to or more favorable for the segmented order than the specified limit price in 

the qualified auction. 

(b) Exceptions. The order competition requirement of paragraph (a) of this section shall 

not apply if: 

(1) The segmented order is received and executed by the restricted competition trading 

center during a time period when no open competition trading center is operating a qualified 

auction for the segmented order; 

(2) The market value of the segmented order is at least $200,000 calculated with 

reference to the midpoint of the national best bid and national best offer when the segmented 

order is received by the restricted competition trading center; 



393 

 

(3) The segmented order is executed by the restricted competition trading center at a price 

that is equal to or more favorable for the segmented order than the midpoint of the national best 

bid and national best offer when the segmented order is received by the restricted competition 

trading center; 

(4) The segmented order is a limit order with a limit price selected by the customer that is 

equal to or more favorable for the segmented order than the midpoint of the national best bid and 

national best offer when the segmented order is received by the restricted competition trading 

center; or 

(5) The segmented order is received and executed by the restricted competition trading 

center during a time period when no open competition trading center is operating a qualified 

auction for the segmented order that accepts orders that are not entirely in whole shares, and the 

customer selected a size for a segmented order that is not entirely in whole shares of an NMS 

stock, in which case any portion of such segmented order that is less than one whole share of the 

NMS stock, and only such portion, shall not be subject to the order competition requirement of 

paragraph (a) of this section. 

(c) Qualified auction requirements. An open competition trading center shall comply 

with the following requirements for operation of a qualified auction for segmented orders. 

(1) Auction message. (i) An auction message announcing the initiation of a qualified 

auction for a segmented order shall be provided for dissemination in consolidated market data 

pursuant to § 242.603(b). Each such auction message shall invite priced auction responses to 

trade with a segmented order and shall include the identity of the open competition trading center 

and the symbol, side, size, limit price, and identity of the originating broker for the segmented 

order. 



394 

 

(ii) If more than one broker is an originating broker for a segmented order, the originating 

broker identified pursuant to paragraph (c)(1)(i) of this section shall be the broker responsible for 

approving the opening of accounts with customers. 

(iii) Notwithstanding the provisions of paragraph (c)(1)(i) of this section, the identity of 

the originating broker shall not be disclosed in the auction message if such originating broker 

certifies that it has established, maintained, and enforced written policies and procedures 

reasonably designed to assure that the identity of the originating broker will not be disclosed, 

directly or indirectly, to any person that potentially could participate in the qualified auction or 

otherwise trade with the segmented order, and the originating broker’s certification is 

communicated to the open competition trading center conducting the qualified auction. 

(2) Auction responses. An open competition trading center shall accept auction responses 

for a period of at least 100 milliseconds after an auction message is provided for dissemination in 

consolidated market data and shall end the auction not more than 300 milliseconds after an 

auction message is provided for dissemination in consolidated market data. Auction responses 

shall remain undisplayed during the auction period and not disseminated at any time thereafter. 

(3) Pricing increments. Segmented orders and auction responses shall be priced in an 

increment of no less than $0.001 for segmented orders and auction responses with prices of 

$1.00 or more per share, in an increment of no less than $0.0001 for segmented orders and 

auction responses with prices of less than $1.00 per share, or at the midpoint of the national best 

bid and national best offer. 

(4) Fees and rebates. No fee shall be charged for submission or execution of a segmented 

order. No fee shall be charged for submission of an auction response. The fee for execution of an 

auction response shall not exceed $0.0005 per share for auction responses priced at $1.00 per 



395 

 

share or more, shall not exceed 0.05% of the auction response price per share for auction 

responses priced at less than $1.00 per share, and otherwise shall be the same rate for executed 

auction responses in all auctions. Any rebate for the submission or execution of a segmented 

order or for the submission or execution of an auction response shall not exceed $0.0005 per 

share for segmented orders or auction responses priced at $1.00 per share or more, shall not 

exceed 0.05% of the segmented order or auction response price per share for segmented orders or 

auction responses priced at less than $1.00 per share, and otherwise shall be the same rate for 

segmented orders in all auctions and shall be the same rate for auction responses in all auctions. 

(5) Execution priority of auction responses and resting orders. (i) The highest priced 

auction responses to buy and the lowest priced auction responses to sell shall have priority of 

execution. 

(ii) Auction responses for the account of a customer shall have priority over auction 

responses for the account of a broker or dealer at the same price. 

(iii) As long as an auction response is received within the prescribed time period, 

execution priority shall not be based on time of receipt of the auction response. 

(iv) The terms of execution priority shall not favor the broker or dealer that routed the 

segmented order to the auction, the originating broker for the segmented order, the open 

competition trading center operating the auction, or any affiliate of the foregoing persons. 

(v) Orders resting on a continuous order book of the open competition trading center 

operating the qualified auction at the conclusion of an auction period shall have priority over 

auction responses at a less favorable price for the segmented order. Displayed orders resting on a 

continuous order book of the open competition trading center operating the qualified auction 

shall have priority over auction responses at the same price. Auction responses shall have 



396 

 

priority over undisplayed orders resting on a continuous order book of the open competition 

trading center operating the qualified auction at the same price. 

(d) Open competition trading centers. (1) A national securities exchange or NMS Stock 

ATS shall not operate a qualified auction for segmented orders unless it complies with the 

provisions of this section and meets the definition of open competition trading center in § 

242.600(b)(64). 

(2) An open competition trading center shall not operate a system, other than a qualified 

auction, that is limited, in whole or in part, to the execution of segmented orders unless any 

segmented order executed through such system:  

(i) Is received and executed by the open competition trading center during a time period 

when no open competition trading center is operating a qualified auction for the segmented 

order; 

(ii) Has a market value of at least $200,000 calculated with reference to the midpoint of 

the national best bid and national best offer when the segmented order is received by the open 

competition trading center; or 

(iii) Is executed by the open competition trading center at a price that is equal to or more 

favorable for the segmented order than the midpoint of the national best bid and national best 

offer when the segmented order is received by the open competition trading center. 

(iv) Is a limit order with a limit price selected by the customer that is equal to or more 

favorable for the segmented order than the midpoint of the national best bid and national best 

offer when the segmented order is received by the open competition trading center; or 

(v) Is received and executed by the open competition trading center during a time period 

when no open competition trading center is operating a qualified auction for the segmented order 



397 

 

that accepts orders that are not entirely in whole shares, and is a size, selected by the customer, 

that is not entirely in whole shares of an NMS stock, in which case any portion of such 

segmented order that is less than one whole share of the NMS stock, and only such portion, may 

be executed through such system. 

(e) Originating brokers. (1) An originating broker shall establish, maintain, and enforce 

written policies and procedures reasonably designed to identify the orders of customers as 

segmented orders as defined in § 242.600(b)(91).  

(2) An originating broker shall not route a customer order identified as a segmented order 

without also identifying such order as a segmented order to the routing destination. 

(3) An originating broker that makes a certification referred to in paragraph (c)(1)(iii) of 

this section shall establish, maintain, and enforce written policies and procedures reasonably 

designed to assure that the identity of the originating broker will not be disclosed, directly or 

indirectly, to any person that potentially could participate in the qualified auction or otherwise 

trade with the segmented order. 

(4) Where there are multiple originating brokers for a segmented order, an originating 

broker shall not be deemed to be in violation of the provisions of paragraphs (e)(1) through (3) of 

this section arising solely from a failure to meet a responsibility that was specifically allocated 

by prior written agreement to another originating broker. 

(f) Brokers or dealers. (1) No broker or dealer that receives an order identified as a 

segmented order shall route such order without identifying such order as a segmented order to 

the routing destination. 

(2) No broker or dealer with knowledge of where a segmented order is to be routed for 

execution shall submit an order, or enable an order to be submitted by any other person, to the 



398 

 

continuous order book of an open competition trading center or of a national securities exchange 

that could have priority to trade with the segmented order at such open competition trading 

center or national securities exchange. 

(g) National securities exchanges. A national securities exchange shall not operate a 

system, other than a qualified auction, that is limited, in whole or in part, to the execution of 

segmented orders unless any segmented order executed through such system: 

(1) Is received and executed by the national securities exchange during a time period 

when no open competition trading center is operating a qualified auction for the segmented 

order; 

(2) Has a market value of at least $200,000 calculated with reference to the midpoint of 

the national best bid and national best offer when the segmented order is received by the national 

securities exchange; 

(3) Is executed by the national securities exchange at a price that is equal to or more 

favorable for the segmented order than the midpoint of the national best bid and national best 

offer when the segmented order is received by the national securities exchange.  

(4) Is a limit order with a limit price selected by the customer that is equal to or more 

favorable for the segmented order than the midpoint of the national best bid and national best 

offer when the segmented order is received by the national securities exchange; or 

(5) Is received and executed by the national securities exchange during a time period 

when no open competition trading center is operating a qualified auction for the segmented order 

that accepts orders that are not entirely in whole shares, and is a size, selected by the customer, 

that is not entirely in whole shares of an NMS stock, in which case any portion of such 



399 

 

segmented order that is less than one whole share of the NMS stock, and only such portion, may 

be executed through such system. 

§ 242.1000 [Amended] 

13. Amend § 242.1000, in the definition Plan processor, by removing the text “§ 

242.600(b)(67)” and adding in its place “§ 242.600(b)(73)”. 

By the Commission. 

Dated: December 14, 2022. 

 

 

J. Matthew DeLesDernier, 

Deputy Secretary.