
[Federal Register Volume 79, Number 125 (Monday, June 30, 2014)]
[Notices]
[Pages 36840-36848]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15205]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72460]


Order Directing the Exchanges and the Financial Industry 
Regulatory Authority To Submit a Tick Size Pilot Plan

June 24, 2014.
    Notice is hereby given that, pursuant to Section 11A(a)(3)(B) of 
Securities Exchange Act of 1934 (``Act''),\1\ the Securities and 
Exchange Commission (``Commission'') orders the BATS Exchange, Inc., 
BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, 
Inc., EDGX Exchange, Inc., The Nasdaq Stock Market LLC, Nasdaq OMX BX, 
Nasdaq OMX Phlx, National Stock Exchange, Inc., New York Stock Exchange 
LLC, NYSE Arca, Inc., NYSE MKT LLC, and Financial Industry Regulatory 
Authority, Inc. (``FINRA'') (collectively the ``Participants'' and 
individually a ``Participant'') to act jointly in developing and filing 
with the Commission a national market system plan to implement a pilot 
program that, among other things, would widen the quoting and trading 
increments for certain small capitalization stocks as described in 
detail below (``Tick Size Pilot Plan''). The Tick Size Pilot Plan 
should be filed with the Commission pursuant to Rule 608 under the Act 
\2\ no later than August 25, 2014.
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    \1\ Section 11A(a)(3)(B) authorizes the Commission, in 
furtherance of its statutory directive to facilitate the 
establishment of a national market system, by rule or order, ``to 
authorize or require self-regulatory organizations to act jointly 
with respect to matters as to which they share authority under [the 
Act] in planning, developing, operating, or regulating a national 
market system (or a subsystem thereof) or one or more facilities 
thereof.'' 15 U.S.C. 78k-1(a)(3)(B).
    \2\ 17 CFR 242.608.
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I. Background

    Prior to implementing decimal pricing in April 2001, the U.S. 
equity markets used fractions as minimum pricing increments. In the 
1990s, the Commission began to re-examine the fractional pricing 
structure, and in 1994, the Commission staff issued a report (the 
``Market 2000 Report'') on the equities markets that, among other 
things, expressed concern that the then-existing 1/8th of a dollar 
minimum pricing increment was ``caus[ing] artificially wide spreads and 
hinder[ing] quote competition,'' leading to excessive profits for 
market makers.\3\ In the Market 2000 Report, the Commission staff also 
expressed concern that fractional pricing put the U.S. equity markets 
at a competitive disadvantage to foreign equity markets that used 
decimal pricing increments. The Commission used these findings as part 
of a public discussion on whether the U.S. equity markets should adopt 
a lower fractional minimum tick size or adopt decimal pricing.
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    \3\ See Securities and Exchange Commission, Market 2000: An 
Examination of Current Equity Market Developments (1994).
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    At the same time, the exchanges and NASDAQ (the predecessor to The 
Nasdaq Stock Market LLC) began to implement lower tick sizes, generally 
to 1/16th of $1.00.\4\ The Commission, the exchanges and NASDAQ 
believed that the reductions in tick size would provide multiple 
benefits to the equity markets, including better pricing and greater 
liquidity.
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    \4\ See Securities Exchange Act Release Nos. 31118 (August 28, 
1992), 57 FR 40484 (September 3, 1992) (SR-Amex-91-07) (Order 
approving proposed rule change relating to amendments to rule 127-
minimum fractional changes); 38571 (May 5, 1997), 62 FR 25682 (May 
9, 1997) (SR-Amex-97-14) (Order granting approval to proposed rule 
change relating to trading in 1/16th of $1.00); 38897 (August 1, 
1997), 62 FR 42847 (August 8, 1997) (SR-NYSE-97-21) (Order granting 
approval to proposed rule change relating to trading differentials 
for equity securities); 38678 (May 27, 1997) 62 FR 30363 (June 3, 
1997) (SR-NASD-97-27) (Order granting approval to proposed rule 
change to decrease the minimum quotation increment for certain 
securities listed and traded on The NASDAQ Stock Market to 1/16th of 
$1.00). These tick sizes were not binding on other markets. Some 
electronic communication networks (ECNs) allowed prices in 
increments of 1/256th of $1.00. See also Securities Exchange Act 
Release No. 44568, 66 FR 38390, 38392 (July 24, 2001) (Request for 
Comment on the Effects of Decimal Trading in Subpennies).
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    In January 2000, the Commission ordered the exchanges and NASD (the 
predecessor to FINRA) to submit a decimalization plan that would 
implement decimal pricing in certain securities by July 2000.\5\ 
Throughout 2000, the Commission and the self-regulatory organizations 
(``SROs'') worked to phase-out fractional pricing and phase-in decimal 
pricing.\6\ The conversion to decimal pricing was completed in April 
2001.\7\ These actions reduced the allowable tick size to a penny but 
did not mandate a minimum tick size.
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    \5\ See Securities Exchange Act Release No. 42360 (January 28, 
2000), 65 FR 5003 (February 2, 2000) (``January Order'').
    \6\ In April 2000, the Commission issued an order staying the 
deadlines set forth in the January Order and issued a notice 
requesting comment on two alternatives for implementing 
decimalization. See Securities Exchange Act Release No. 42685 (April 
13, 2000), 65 FR 21046 (April 19, 2000). In June, the Commission 
issued another order that directed the exchanges and NASD to submit 
a plan to phase-in decimal pricing starting in in September 2000, 
which was to be completed by April 2001. See Securities Exchange Act 
Release No. 42914 (June 8, 2000), 65 FR 38010 (June 19, 2000).
    \7\ The exchanges and NASD submitted a plan, started the phase-
in on time and finished implementing decimalization by April 2001. 
See Commission Notice: Decimals Implementation Plan for the Equities 
and Options Markets (July 24, 2000), available at http://www.sec.gov/rules/other/decimalp.htm.
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    In 2004, the Commission proposed, and then re-proposed, Rule 612 of 
Regulation NMS to establish a minimum price variation (``MPV'') of one 
penny.\8\ Several commenters on the original proposal had recommended 
an MPV of greater than one penny. In response, the Commission noted 
that proposed Rule 612 would ``set a floor for the MPV, not determine 
an optimal MPV.'' \9\ The Commission further stated that the conversion 
to decimal pricing had ``reduced spreads, thus resulting in reduced 
trading costs for investors entering orders--particularly for smaller 
orders--that are executed at or within the quotations,'' \10\ and 
because of these benefits the Commission did not propose a higher MPV. 
It added, however, that ``if the SROs in the future believe that an 
increase in the MPV is necessary or desirable, they may propose rule 
changes to institute the higher MPV'' \11\ and that the Commission 
would evaluate them at that time. In 2005, the Commission adopted 
Regulation NMS Rule 612, and since that time the one penny MPV has 
applied to all listed stocks priced at $1.00 or more per share.\12\
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    \8\ See Securities Exchange Act Release No. 50870 (December 16, 
2004), 69 FR 77424 (December 27, 2004) (Regulation NMS proposing 
release).
    \9\ Id. at 77458.
    \10\ Id.
    \11\ Id.
    \12\ Rule 612 specifies minimum pricing increments for NMS 
stocks. In general, Rule 612 prohibits market participants from 
displaying, ranking, or accepting quotations, orders, or indications 
of interest in any NMS stock priced in an increment smaller than 
$0.01 if the quotation, order, or indication of interest is priced 
equal to or greater than $1.00 per share. If the quotation, order, 
or indication of interest is priced less than $1.00 per share, the 
minimum pricing increment is $0.0001. 17 CFR 242.612. An NMS stock 
means any security or class of securities, other than an option, for 
which transaction reports are collected, processed, and made 
available pursuant to an effective transaction reporting plan. See 
17 CFR 242.600(b)(46) and (47).
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    Since the adoption of Regulation NMS, the Commission has continued 
to evaluate tick sizes in the equity

[[Page 36841]]

markets.\13\ In January 2010, the Commission issued a Concept Release, 
which requested comments on issues, including high frequency trading, 
order routing, market data linkages, and undisplayed liquidity.\14\ In 
the discussion on undisplayed liquidity, the Commission requested 
comments on whether public price discovery and execution quality have 
suffered, and specifically questioned whether the minimum pricing 
increment for lower priced stocks should be reduced, noting that 
broker-dealers may have greater incentives to internalize low-priced 
stocks than higher priced stocks, given the relatively larger minimum 
spreads that could be earned by broker-dealers. In response, the 
Commission received several letters opposing \15\ and supporting \16\ a 
pilot program to test sub-penny tick increments. The Commission also 
received letters recommending a pilot program to test a wider variety 
of tick sizes.\17\
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    \13\ In addition, the Commission has evaluated tick sizes in the 
options market and has approved a penny pilot program in the options 
markets. See e.g., Securities and Exchange Act Release Nos. 55153 
(January 23, 2007), 72 FR 4553 (January 31, 2007) (SR-Phlx-2006-74); 
55154 (January 23, 2007), 72 FR 4743 (February 1, 2007) (SR-CBOE-
2006-92); 55155 (January 23, 2007), 72 FR 4741 (February 1, 2007) 
(SR-BSE-2006-49); 55156 (January 23, 2007), 72 FR 4759 (February 1, 
2007) (SR-NYSEArca-2006-73); 55161 (January 24, 2007), 72 FR 4754 
(February 1, 2007) (SR-ISE-2006-62); and 55162 (January 24, 2007), 
72 FR 4738 (February 1, 2007) (SR-Amex-2006-106).
    \14\ See Securities Exchange Act Release No. 61358 (January 14, 
2010), 75 FR 3594 (January 21, 2010) (``Concept Release'').
    \15\ See, e.g., Letters from Karrie McMillan, General Counsel, 
Investment Company Institute, dated April 21, 2010; Ann Vlcek, 
Managing Director and Associate General Counsel, Securities Industry 
and Financial Markets Association, dated April 29, 2010; James J. 
Angel, Associate Professor, McDonough School of Business, Georgetown 
University; Lawrence E. Harris, Fred V. Keenan Chair in Finance, 
Professor of Finance and Business Economics, Marshall School of 
Business, University of Southern California; Chester S. Spatt, 
Pamela R. and Kenneth B. Dunn Professor of Finance, Director, Center 
for Financial Markets, Tepper School of Business, Carnegie Mellon 
University, dated February 23, 2010.
    \16\ See, e.g., Letters from Eric Swanson, General Counsel, BATS 
Exchange, Inc., dated April 21, 2010 and Eric W. Hess, General 
Counsel, Direct Edge, dated April 28, 2010.
    \17\ See, e.g., Letters from Janet M. Kissane, SVP--Legal and 
Corporate Secretary, Office of the General Counsel, NYSE Euronext, 
dated April 23, 2010; and John A. McCarthy, General Counsel, GETCO 
LLC, Christopher R. Concannon, Partner, Virtu Financial LLC, and 
Leonard J. Amoruso, General Counsel, Knight Capital Group, Inc., 
dated July 9, 2010. In addition, in April 2010, BATS Exchange, Inc., 
NASDAQ OMX Group, Inc., and NYSE Euronext, Inc. petitioned the 
Commission to exercise its exemptive authority under Rule 612(c) of 
Regulation NMS to implement a pilot program that would permit market 
participants to display, rank, or accept from any person, a bid or 
offer or order in a tick increment smaller than $0.01. See Letter 
from Chris Isaacson, Chief Operating Officer, BATS Exchange, Inc., 
Eric Noll, Executive Vice President, NASDAQ OMX Group, Inc., and 
Larry Leibowitz, Chief Operating Officer, NYSE Euronext, Inc. to 
Elizabeth M. Murphy, Secretary, Commission, dated on April 30, 2010 
(``BATS/NASDAQ/NYSE Letter'') and available at http://www.sec.gov/spotlight/regnms/jointnmsexemptionrequest043010.pdf. The petitioners 
stated their belief that the $0.01 MPV has resulted in artificially 
wide publicly-displayed quotes for certain lower-priced, liquid 
securities, which has negatively impacted the public price discovery 
process and resulted in inferior execution prices for investors. The 
petitioners requested the Commission to implement a six-month pilot 
program to permit sub-penny quoting at $0.005 in certain securities 
trading between $1.00 and $20.00 (the securities are listed on the 
Appendix to the petitioners' letter and included an exchange-traded 
fund (QQQQ), which trades at a price greater than $20.00). The 
petitioners stated their belief that allowing a smaller MPV for 
certain lower-priced, but liquid, securities would allow competitive 
market forces to better reflect an approximation of a stock's value.
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    From time to time since the introduction of decimal pricing, 
concerns have been raised that the one penny MPV may be detrimental to 
small- and middle-sized companies. In particular, a few studies have 
raised questions regarding whether decimalization has reduced 
incentives for underwriters to pursue public offerings of smaller 
companies, limited the production of sell-side research for small and 
middle capitalization companies, and made it less attractive to become 
a market maker in the shares of smaller companies.\18\
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    \18\ For a complete discussion of these studies see Report to 
Congress on Decimalization (July 2012) available at http://www.sec.gov/news/studies/2012/decimalization-072012.pdf 
(``Decimalization Report'').
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    In 2012, Congress passed the Jumpstart Our Business Startups Act 
(``JOBS Act''), which contained provisions relating to the impact of 
decimalization on small and middle capitalization companies. 
Specifically, Section 106(b) of the JOBS Act directed the Commission to 
conduct a study and report to Congress on how decimalization affected 
the number of initial public offerings (``IPOs''), and the liquidity 
and trading of smaller capitalization company securities. The 
Commission submitted the staff study to Congress in the July 2012 
Decimalization Report.\19\
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    \19\ See id.
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    The Decimalization Report summarized the academic literature 
relating to the impact of decimalization on the market generally, and 
on the securities of small and middle capitalization companies. The 
Commission staff noted that there were no academic papers that directly 
examined the relationship between decimalization and the number of 
IPOs. The academic studies summarized in the Decimalization Report 
analyzed decimalization's impact on spreads, depth, execution speed, 
trade size, specialist/market maker participation and profitability, 
market and limit orders, order routing, volatility, and incentives for 
broker promotion. The Decimalization Report identified the main 
empirical findings of the academic literature in each of these areas. 
For example, some studies found that while both effective and quoted 
spreads declined after decimalization, there is some evidence that, at 
least for NASDAQ small capitalization stocks, the decline is not 
statistically significant, and the effect of decimalization on 
institutional transaction costs is mixed. In addition, some studies 
found that while quoted depth, on average, declined after 
decimalization, cumulative depth at competitive prices did not change. 
Some studies found that market maker participation increased after 
decimalization across all market capitalization categories, but 
decimalization does not appear to have reduced profitability.
    In the Decimalization Report, the Commission staff also surveyed 
tick-size conventions in non-U.S. markets. Many foreign jurisdictions 
utilize a tiered tick size approach that provides greater variability 
for tick sizes based on the price level of a stock rather than the 
``one size fits all'' approach utilized in the United States. Many 
countries have tick sizes that are four or more times wider than in the 
U.S. on a percentage basis. However, a few other countries have tick 
sizes that are less than half the size of the U.S. on a percentage 
basis. Therefore, the Decimalization Report stated that the U.S. market 
would benefit from a broad review of tick sizes, and such review would 
be informed by the experiences in other countries.\20\
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    \20\ See Decimalization Report at 18. The Decimalization Report 
also examined the level of small company IPOs in other countries 
during the time before and after decimalization to assess whether 
other countries had experienced declines in small company IPOs like 
the U.S. experienced. An examination of other countries' IPO 
activities did not show a decline like that experienced in the U.S., 
even in those countries that have smaller tick sizes.
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    Finally, the Decimalization Report considered the panel discussion 
that occurred during the meeting of the SEC Advisory Committee on Small 
and Emerging Companies (``Small Company Advisory Committee'') \21\ in 
June 2012 that related to market structure issues and their impact on 
small and middle capitalization companies and on IPOs. In particular, 
some Small Company Advisory Committee members commented that it may be 
hard to

[[Page 36842]]

isolate the impact of decimalization on small company IPOs from other 
concurrent factors, such as the enactment of the Sarbanes-Oxley Act in 
2002, the Global Analyst Research Settlement in 2003, and the emergence 
of high frequency trading and dark pools. As discussed further below, 
the Small Company Advisory Committee continued to evaluate the issues 
raised by decimalization and its impact on small capitalization 
companies, and issued recommendations in February 2013.\22\
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    \21\ More information on the committee is available at http://www.sec.gov/info/smallbus/acsec.shtml.
    \22\ See note 26 infra.
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    While the Decimalization Report did not reach any firm conclusions 
about the impact of decimalization on the number of IPOs or the 
liquidity and trading of small capitalization companies, it did 
recommend that the Commission continue to study this area. The 
Decimalization Report specifically suggested a public roundtable, where 
recommendations could be presented on a pilot program that would 
generate data to allow the Commission to further assess 
decimalization's impact. On February 5, 2013, the Commission staff held 
a Decimalization Roundtable with participation from a wide range of 
market participants, academics, and others. Many of the panelists were 
of the view that factors other than decimalization were more 
significant factors in the decline in IPOs in recent years. While views 
differed on the likely outcome of any increase in the minimum tick 
size, there was broad support among the panelists for the Commission to 
conduct a pilot program to gather further information, particularly 
with respect to the impact of wider tick sizes on liquidity in small 
capitalization companies.\23\ This view was reflected in comment 
letters submitted to the Commission in advance of the Roundtable.\24\ 
Some panelists, however, expressed concern about the potential costs to 
investors of wider minimum tick sizes.\25\
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    \23\ There was some discussion at the Roundtable about the BATS/
NASDAQ/NYSE Letter, which requested the implementation of a sub-
penny pilot, see supra note 17. See also letter from Chris Isaacson, 
SVP & COO and Eric Swanson, Secretary, BATS Global Markets to 
Elizabeth M. Murphy, Secretary, Commission, dated January 29, 2013). 
In general, some panelists suggested that adding narrower ticks to a 
pilot could counterbalance the negative issues related to the 
potentially increased costs to investors for the widening of spreads 
in small stocks. However, panelists noted that institutional 
investors and issuers were not supportive of narrower tick sizes and 
one panelist suggested that any pilot should be limited to the small 
cap issuers to keep it simple and targeted for the market.
    \24\ See e.g. letters from Chris Isaacson, SVP & COO, and Eric 
Swanson, Secretary, BATS Global Markets, Inc., dated January 29, 
2013 (suggesting a tick size pilot could be used to determine the 
optimal tick size for enabling efficient price discovery, while 
maintaining low transaction costs for investors, and improving 
efficient access to capital for small and middle capitalization 
companies), David Weild, Senior Advisor, Grant Thornton LLP, dated 
January 29, 2013 (indicating the belief that the implementation of a 
tick size pilot could be a step in increasing the number of initial 
public offering), Paul Jiganti, Managing Director, Market Structure 
Client Advocacy, TD Ameritrade, Inc., dated February 4, 2013 
(indicating support for a tick size pilot and suggesting that such a 
pilot should focus on trading volume, price, volatility, and to a 
lesser extent, market capitalization), Patrick J. Healy, CEO, Issuer 
Advisory Group, dated February 4, 2013 (indicating the belief that 
while decimalization has been beneficial to the market, they would 
support a tick size pilot that would focus on less liquid 
companies), Colin Clark, Senior Vice President, NYSE Euronext, dated 
February 5, 2013 (suggesting that less liquid companies could 
benefit from increased tick sizes and that a pilot program could 
provide the Commission with data that can be utilized in a cost-
benefit analysis to determine whether or not to make the pilot 
permanent), and Jeffrey M. Solomon, Chief Executive Officer, Cowen 
and Company, dated February 5, 2013 (suggesting that a pilot program 
could provide economically feasible means for investment banks to 
provide research on small capitalization stocks).
    \25\ A transcript of the Decimalization Roundtable is available 
at http://www.sec.gov/news/otherwebcasts/2013/decimalization-transcript-020513.txt. In addition, comments received by the 
Commission are available at http://www.sec.gov/comments/4-657/4-657.shtml. Since the roundtable, the Commission has received eleven 
additional comment letters. Generally, these later commenters 
expressed support for a pilot program to test wider tick size for 
smaller capitalization companies. See, e.g., letters from David 
Weisberger, Executive Principal, Two Sigma Securities, dated April 
23, 2013; Stuart J. Kaswell, Executive Vice President and Managing 
Director, General Counsel, Managed Funds Association, dated May 1, 
2013; Ernest F. Callipari, Equity Trader, dated May 29, 2013; Daniel 
Keegan, Managing Director, Head of Equities for the Americas, 
Citigroup Global Markets Inc., dated October 22, 2013 (commenting 
that pilot program should apply to illiquid stocks of all sizes); 
and Joseph Saluzzi, Partner, Themis Trading LLC, dated November 20, 
2013. One commenter suggested that the Commission set the MPV at 
five cents. See letter from James J. Maguire, Sr., to Chair White, 
dated January 21, 2014.
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    Since the Decimalization Roundtable, discussions have continued 
with respect to the possibility of raising the minimum tick sizes for 
small capitalization stocks, and the prospect of a pilot program to 
test the impact thereof. The Small Company Advisory Committee, in March 
2013, recommended that the Commission adopt rules that would allow 
small exchange-listed companies to choose their own minimum tick size 
from a limited range designated by the Commission.\26\ In the view of 
the Small Company Advisory Committee, the economic incentives provided 
by wider minimum tick sizes would encourage market making and research 
analyst coverage, and thereby enhance the attractiveness of the IPO 
market for small companies and their ability to raise capital.
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    \26\ See Advisory Committee on Small and Emerging Companies, 
Recommendations Regarding Trading Spreads for Smaller Exchange-
Listed Companies (February 1, 2013) available at http://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-spread-tick-size.pdf.
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    In November 2013, the Equity Capital Formation Task Force 
(``ECFTF'') \27\ issued to the U.S. Department of the Treasury its 
report: From the On-Ramp to the Freeway: Refueling Job Creation and 
Growth by Reconnecting Investors with Small-Cap Companies (``ECFTF 
Report'').\28\ The ECFTF recommended, among other things, that the 
exchanges conduct a pilot program, overseen by the Commission, that 
would establish the Small-cap Trading Rules (``STaR'') where, companies 
with a market capitalization below $750 million would be quoted in 
$0.05 increments and would trade only at the bid, the offer, or the 
mid-point between the bid and the offer.
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    \27\ The Equity Capital Formation Task Force is comprised of 
representatives from mutual funds, venture capital firms, exchanges, 
broker-dealers, academics, investor relations advisors and 
securities industry trade groups. The task force was formed in June 
2013 to: (1) Examine the challenges that startups and small-cap 
companies face in raising equity capital in the public market 
environment, and (2) develop recommendations for policy-makers that 
will help such companies gain greater access to the capital they 
need to grow their businesses and generate private sector job 
growth.
    \28\ This report is available at http://www.equitycapitalformationtaskforce.com/files/ECF%20From%20the%20On-Ramp%20to%20the%20Freeway%20vF.pdf.
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    More recently, on January 31, 2014, the Commission's Investor 
Advisory Committee (``Investor Advisory Committee''),\29\ recommended 
that the Commission not conduct a pilot program to study increased 
minimum tick sizes for small-capitalization companies.\30\ In general, 
the Investor Advisory Committee expressed concern that a pilot that 
widens the minimum quoting increment would

[[Page 36843]]

disproportionately harm retail investors because their trading costs 
would rise.\31\ If the Commission determines to conduct a tick size 
pilot,\32\ however, the Investor Advisory Committee recommended that 
any such pilot: (a) Should be short-term, with a guaranteed sunset 
unless benefits are proven to outweigh the costs; (b) should be 
designed to measure the costs and benefits to investors, with a 
particular focus on retail investors; and (c) should not focus 
exclusively on increasing tick size, but also on other changes that 
could encourage appropriate trading, enhance liquidity, or facilitate 
capital formation.\33\
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    \29\ The Investor Advisory Committee was established by Section 
911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act''), to advise the Commission on regulatory 
priorities, the regulation of securities products, trading 
strategies, fee structures, the effectiveness of disclosure, and on 
initiatives to protect investor interests and to promote investor 
confidence and the integrity of the securities marketplace. The 
Dodd-Frank Act authorizes the Investor Advisory Committee to submit 
findings and recommendations for review and consideration by the 
Commission. See Section 911 of the Dodd-Frank Act, Pub. L. 111-203, 
124 Stat. 1376 (2010).
    \30\ The Investor Advisory Committee recommendations are 
available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/decimal-pricing-draft-recommendation-iac.pdf. A 
member of the IAC dissented from this recommendation and recommended 
that the Commission conduct a pilot program with respect to modified 
decimal pricing. The dissenting opinion is available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/dissenting-opinion-decimalization-iac.pdf.
    \31\ The Investor Advisory Committee suggested that, if the 
Commission believes additional steps are needed to promote capital 
formation or enhance liquidity for smaller capitalization 
securities, the Commission should consider all approaches, such as, 
requiring the display of depth-of-book of orders, restricting 
certain jumping ahead strategies, and rules that better assure the 
validity of displayed quotes. See Investor Advisory Committee 
recommendations, supra note 30.
    \32\ The Investor Advisory Committee noted that if the 
Commission nevertheless were to propose a pilot, it would review the 
details of the proposal and potentially reconsider its 
recommendation. See Investor Advisory Committee recommendations, 
supra note 30.
    \33\ The Commission continues to review the findings and 
recommendations of the Investor Advisory Committee. See Section 
911(g) of the Dodd-Frank Act.
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II. Discussion

    Section 11A(a)(2) of the Act \34\ directs the Commission, having 
due regard for the public interest, the protection of investors, and 
the maintenance of fair and orderly markets, to facilitate the 
establishment of a national market system for securities. Section 
11A(a)(3)(B) provides the Commission the authority to require the SROs, 
by order, ``to act jointly . . . in planning, developing, operating, or 
regulating a national market system (or a subsystem thereof).'' \35\
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    \34\ 15 U.S.C. 78k-1(a)(2).
    \35\ 15 U.S.C. 78k-1(a)(3)B).
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    The Commission believes that it is in the public interest for the 
Participants to develop and file with the Commission a Tick Size Pilot 
Plan, with the terms and conditions set forth in Section III below, as 
a national market system (``NMS'') plan pursuant to Rule 608(a) of 
Regulation NMS.\36\ Once filed, the Commission would publish the Tick 
Size Pilot Plan for public comment, and thereafter consider whether to 
approve it, in accordance with Rule 608(b) of Regulation NMS.\37\
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    \36\ 17 CFR 242.608(a).
    \37\ 17 CFR 242.608(b).
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    Decimalization of the U.S. equity markets occurred over a decade 
ago. Since that time, the nature of trading, the structure of the 
markets, and the roles of market participants have changed 
significantly.\38\ As discussed above, concerns have been expressed 
from a variety of sources that decimalization, and the associated one 
penny MPV, may have had a detrimental impact on the trading and 
liquidity of small capitalization stocks.\39\ Therefore, the Commission 
believes that it is in the public interest for the Commission to 
further study and assess decimalization's impact on the liquidity and 
trading of the securities of small capitalization companies.\40\ The 
submission of proposed NMS plan for a Tick Size Pilot Plan will provide 
the Commission with the means to continue to gather further information 
and views on the impact of decimalization on the liquidity and trading 
of the securities of small capitalization companies. In addition, a 
proposed NMS plan for a Tick Size Pilot Plan would allow the Commission 
to gather further comments on whether a Tick Size Pilot Plan is a 
viable vehicle by which the Commission could gather data to test 
whether a wider tick benefits small capitalization companies and their 
investors.
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    \38\ See e.g., Concept Release, supra note 14.
    \39\ See e.g., Rebuilding the IPO On-Ramp, presented to the U.S. 
Department of Treasury (2011) (``IPO Task Force Report''); David 
Weild and Edward Kim, Market Structure is Causing the IPO Crisis--
and More, Grant Thornton Capital Markets Series (June 2010).
    \40\ The Commission notes that some market participants have 
recommended that the Commission implement a pilot program that would 
permit tick increments smaller than $0.01. See BATS/NASDAQ/NYSE 
Letter, supra note 17. The Commission continues to evaluate this 
petition. At this time, however, the Commission preliminarily 
believes that the Tick Size Pilot Plan should focus on the impact of 
wider ticks on the trading and liquidity of smaller companies for 
the reasons discussed herein.
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    In the Decimalization Report, the Commission staff reviewed 
academic literature related to the impact of decimalization on the U.S. 
equity markets. While the academic literature indicated a number of 
potential benefits from decimalization, such as an overall reduction in 
effective and quoted spreads, there was some evidence that, at least 
for NASDAQ small capitalization stocks, the decline was not 
statistically significant.\41\ The academic literature also found, 
post-decimalization, evidence of a decline in quoted depth on average 
(although cumulative depth at competitive prices did not appear to 
change), smaller trade sizes, and an increase in the total time to work 
institutional orders.\42\ In addition, the Decimalization Report noted 
that the U.S. has an essentially flat, ``one size fits all'' tick size 
regime, as compared with many foreign jurisdictions that have adopted 
tiered regimes where the tick size varies depending on the price level 
of a stock.\43\ Finally, at the Decimalization Roundtable, there was 
broad support among the panelists for the Commission to conduct a pilot 
program with respect to the impact of wider tick sizes on liquidity in 
small capitalization companies, even though views differed on the 
likely outcome of the pilot.\44\
---------------------------------------------------------------------------

    \41\ See Decimalization Report.
    \42\ See id.
    \43\ See id.
    \44\ See supra note 25 and accompanying text.
---------------------------------------------------------------------------

    Support for a pilot program is not universal, however, particularly 
given that an increase in minimum tick sizes may raise costs for 
investors. This view was reflected, for example, at the Roundtable and 
in the recommendations of the Investor Advisory Committee.\45\
---------------------------------------------------------------------------

    \45\ See supra notes 29 to 33 and accompanying text.
---------------------------------------------------------------------------

    Nevertheless, the Commission believes that legitimate questions 
have been raised as to whether the minimum tick size regime for the 
U.S. equity markets should be refined and enhanced. Specifically, the 
Commission preliminarily believes that it should assess, through a 
targeted short-term pilot program, whether wider minimum tick sizes for 
small capitalization stocks would enhance market quality to the benefit 
of market participants, issuers and U.S. investors. The Commission 
preliminarily believes that such a pilot should facilitate studies of 
the effect of tick size on liquidity, execution quality for investors, 
volatility, market maker profitability, competition, transparency and 
institutional ownership. The Commission has set forth the details of a 
pilot program that the Commission preliminarily believes would produce 
measurable data that would allow the Commission and others to conduct 
such studies.
    Further, the Commission preliminarily believes that the pilot 
described below is sufficiently limited so as to not cause excessive 
disruption to the market. The Commission preliminarily believes that 
the terms of the Tick Size Pilot Plan and the securities to be included 
should mitigate potential harm to investors in the form of increasing 
transaction costs, as expressed by the Investor Advisory Committee. The 
Commission would examine the data generated to measure, among other 
things, any change in transaction costs.
    The Commission is ordering the Participants to jointly file the 
Tick Size Pilot Plan to assure that the pilot

[[Page 36844]]

program, if ultimately approved by the Commission, applies uniformly 
across the U.S. markets. Once the Participants file the Tick Size Pilot 
Plan with the Commission, it will be published for public comment, and 
the Commission will carefully evaluate the comments received as the 
Commission considers whether to approve the Tick Size Pilot Plan.\46\
---------------------------------------------------------------------------

    \46\ 17 CFR 242.608(b).
---------------------------------------------------------------------------

III. Tick Size Pilot Plan

    The Commission hereby orders the Participants to develop and 
jointly file with the Commission, as an NMS plan pursuant to Rule 
608(a) of Regulation NMS,\47\ a Tick Size Pilot Plan with the following 
terms and conditions:
---------------------------------------------------------------------------

    \47\ 17 CFR 242.608(a).
---------------------------------------------------------------------------

     Duration. The length of the pilot program (``Pilot'') 
contemplated by the Tick Size Pilot Plan shall be one year. The 
Commission notes that there has been broad discussion about how long a 
pilot should run.\48\ The Commission preliminarily believes that a one-
year time period would generate sufficient data to reliably analyze the 
effects and impact of wider tick size.\49\ The Commission preliminarily 
believes that the Participants should monitor the data generated during 
the Pilot Period.\50\ The Commission expects that the data produced 
during the Pilot Period should allow the Commission and Participants to 
monitor the impact of the Pilot on the market and investors. Further, 
the Commission would engage in a proactive, ongoing review of the data 
that could inform whether any modifications of the Pilot are necessary.
---------------------------------------------------------------------------

    \48\ See e.g., Letters from Jeffrey M. Solomon, Chief Executive 
Officer, Cowen and Company, dated February 5, 2013 (suggesting a 
pilot term of 7 years); David Weild, Senior Advisor, Grant Thornton 
LLP, dated January 29, 2013 (suggesting a pilot term of 5 years); 
Colin Clark, Senior Vice President, NYSE Euronext, dated February 5, 
2013 (suggesting a pilot term of no longer than one year); David 
Weisberger, Executive Principal, Two Sigma Securities, dated April 
23, 2013 (suggesting a pilot term of at least one year); and Daniel 
Keegan, Managing Director, Head of Equities for the Americas, 
Citigroup Global Markets, Inc., dated October 22, 2013 (suggesting a 
pilot term of one year). See also, the Investor Advisory Committee 
recommendations, supra note 30, which recommended that any pilot be 
short-term, with a guaranteed sunset.
    \49\ These preliminary beliefs are based on analysis of power 
statistics for relevant liquidity measure, e.g., trading volume. 
Being able to examine a subset of stocks facilitates the examination 
of potential threshold levels.
    \50\ During the Pilot Period, the Commission preliminarily 
believes that Participants should notify the Commission if they 
detect any broadly negative impact of the Pilot on market quality.
---------------------------------------------------------------------------

     Securities. The securities to be included in the Pilot 
shall be securities that are NMS common stocks with: (1) A market 
capitalization of $5 billion or less; (2) an average daily trading 
volume of one million shares or less; and (3) a share price of $2 per 
share or more (``Pilot Securities''). The Commission preliminarily 
believes that these criteria will capture the securities of smaller and 
middle capitalization companies with low liquidity and trading activity 
and should provide the Pilot with a broad sample on which to test the 
impact of wider tick sizes.\51\ Requiring stock prices to be $2 or more 
per share assures that ``sub-penny stocks'' \52\ are not included in 
the Pilot.
---------------------------------------------------------------------------

    \51\ The market capitalization and average daily trading volume 
thresholds are based on a staff examination of effective spreads. 
Stocks above these thresholds typically have effective spreads below 
$0.02. Stocks below these thresholds vary with some in the $0.01 
range but most above $0.02 and a substantial percentage above $0.05. 
These thresholds should capture the stocks that would benefit most 
from an increased tick size while still allowing researchers to 
assess which stock characteristics might be correlated with positive 
results from larger tick sizes and which would be correlated with 
negative results from larger tick sizes.
    \52\ ``Sub-penny stocks'' are NMS stocks with a stock price 
below $1 that have a minimum quote increment of $0.0001 under 
current rules. The threshold of $2 was chosen to mitigate the effect 
of NMS stocks for which stock prices may decline to below $1 during 
the pilot period.
---------------------------------------------------------------------------

    In addition, these thresholds are not set directly by the tick size 
so they are relatively exogenous, which could help to inform the 
Commission about any potential rulemaking based on the results of the 
Pilot. Overall, because the stocks below these thresholds have higher 
average effective spreads, the thresholds, though exogenous help to 
target the pilot towards those stocks most likely to benefit from a 
larger tick size. Finally, this group is broad enough to allow 
researchers to examine various threshold levels for potential 
rulemaking.
     Pilot Design. The Pilot should consist of one control 
group and three test groups with 300 Pilot Securities in each test 
group. The selection of Pilot Securities to be included in each test 
group should involve stratified sampling by market capitalization and 
price. The Commission preliminarily believes that choosing three 
relatively small test groups would minimize any potential disruption to 
the current market.\53\ The Commission also preliminarily believes that 
having a control group is vital to test the effects of larger tick 
size, and that a control group with the current quoting and trading 
increments would best represent a baseline for the analysis of the 
effect of the pilot. Further, the Commission preliminarily believes 
that three test groups should generate sufficient data to test a 
variety of potential changes, described below. Finally, the Commission 
preliminarily believes that the inclusion of 300 Pilot Securities per 
test group should allow each test group to be statistically large 
enough to generate data to reliably test for the effects of larger tick 
size and to examine thresholds for any potential rulemaking in the 
future.\54\
---------------------------------------------------------------------------

    \53\ Some commenters suggested that a pilot test several tick 
sizes. See e.g., Letter from David Weild, Senior Advisor, Grant 
Thornton LLP, dated January 29, 2013 (suggesting five tick 
increments of $0.25, $0.10, $0.05, $0.02, and $0.01); and Jeffrey M. 
Solomon, Chief Executive Officer, Cowen and Company, dated February 
5, 2013 (suggesting four tick increments of $0.20, $0.10, $0.05 and 
$0.01). At this time, the Commission is concerned about the cost and 
complexity of a pilot that contains more test groups. See e.g., 
Letter from David Weisberger, Executive Vice President, Two Sigma 
Securities, dated April 23, 2013 to Elizabeth M. Murphy, Secretary, 
Commission (``We urge the Commission to keep the design of the pilot 
simple. Simplicity will ensure timely implementation and reduce 
operational risks as most firms will have to conduct an extensive 
review of their trading software to comply with the pilot.'').
    \54\ These preliminary beliefs are based on staff analysis of 
power statistics for relevant liquidity measures, e.g., trading 
volume. In particular, the staff focused on the least active stocks 
and assessed how many stocks would be needed to detect changes in 
daily liquidity measures. The staff selected 300 as a sample size to 
provide sufficient power to detect changes in liquidity measures for 
a subset of pilot stocks.
---------------------------------------------------------------------------

     Control Group. Pilot Securities in the Control Group shall 
be quoted at the current tick size increment, $0.01 per share, and 
trade at the increments currently permitted.
     Test Group One. Pilot Securities in Test Group One would 
be quoted in $0.05 minimum increments. Trading could continue to occur 
at any price increment that is permitted today. The Commission 
preliminarily believes that the $0.05 minimum quoting increment is 
appropriate. Commission staff's preliminarily analysis of the Pilot 
Securities \55\ indicates that a significant percentage of Pilot 
Securities have bid-ask spreads greater than $0.05. Therefore, the 
Commission believes that the five cent increment should be relatively 
conservative so as to limit increases in transaction costs for 
investors.\56\ In addition, for those securities that currently have 
spreads greater than $0.05, the introduction of a minimum quoting 
increment would prevent market participants from ``pennying'' quotes, 
(i.e., improving the displayed quote by only one penny to gain 
execution priority) as quotes will be made in 5 cent increments. 
Finally, the 5 cent minimum quoting increment

[[Page 36845]]

will allow data to be developed to test whether liquidity increases due 
to the aggregation of liquidity at the 5 cent increments for these 
securities.
---------------------------------------------------------------------------

    \55\ See supra note 51.
    \56\ The transaction cost is measured by the difference of an 
investor buying a security at the offer and then immediately selling 
the same security at the bid. Thus, the wider the minimum quoting 
increment, the greater the transaction cost would be for such round 
trip trade.
---------------------------------------------------------------------------

    There are other Pilot Securities that currently have spreads that 
are less than $0.05. The spreads in these Pilot Securities would be 
directly impacted. However, their inclusion in the Pilot would allow 
data to be developed to study the impact on liquidity for these stocks 
as well. Moreover, trading in this group can occur at any price 
increment allowable today, so the data generated from this group should 
isolate the effects of an increased quoting increment.
    The $0.05 minimum quoting increment is significantly larger than 
the current $0.01 but smaller than the 1/16th of $1.00 increment used 
immediately prior to decimalization. Relative to the alternative 
minimum quoting increments that could be considered, the Commission 
preliminarily believes $0.05 provides a good balance between assuring 
the ability to measure the hypothesized effect, if it exists, and 
mitigating any potential harm to liquidity as a result of a tick size 
that is too large. Therefore, the Commission preliminarily believes 
that a $0.05 minimum quoting increment should be sufficient to test the 
effects of a larger minimum quoting increment for the Pilot Securities. 
The Commission preliminarily believes that changing the minimum quoting 
increment for Test Group One would generate data about the impact of 
changing the minimum quoting increment, and only the minimum quoting 
increment, for the Pilot Securities overall.
     Test Group Two. Pilot Securities in Test Group Two would 
be quoted in $0.05 minimum increments, and traded in $0.05 minimum 
increments subject to certain exceptions. The following exceptions from 
the $0.05 minimum trading increment would be permitted: (1) Trading 
could occur at the mid-point between the national best bid or offer 
(``NBBO''); (2) retail investor orders could be provided with price 
improvement that is at least $0.005 better than the NBBO (i.e., 10% of 
the $0.05 tick size); and (3) certain negotiated trades (i.e., trades 
with a performance target such as volume-weighted average price trades 
and time-weighted average price trades; \57\ and qualified contingent 
trades\58\) could continue to occur at any price increment that is 
permitted today.
---------------------------------------------------------------------------

    \57\ A volume-weighted average price trade is calculated by 
summing up the products of the number of shares traded and the 
respective share price, and dividing by the total number of shares 
bought. A time-weighted average price trade is calculated as the 
average price of a security over a specified period of time.
    \58\ A qualified contingent trade is a transaction consisting of 
two or more component orders, executed as agent or principal, where: 
(1) At least one component order is in an NMS stock; (2) all 
components are effected with a product or price contingency that 
either has been agreed to by the respective counterparties or 
arranged for by a broker-dealer as principal or agent; (3) the 
execution of one component is contingent upon the execution of all 
other components at or near the same time; (4) the specific 
relationship between the component orders (e.g., the spread between 
the prices of the component orders) is determined at the time the 
contingent order is placed; (5) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or since cancelled; (6) the transaction is fully hedged 
(without regard to any prior existing position) as a result of the 
other components of the contingent trade; and (7) the transaction 
that is part of a contingent trade involves at least 10,000 shares 
or has a market value of at least $200,000.
---------------------------------------------------------------------------

    The Commission preliminarily believes that changing the quoting 
increment alone may not be adequate to test the effects of larger tick 
size. The Commission preliminarily believes that if the minimum quoting 
increment is changed without corresponding changes to the minimum 
trading increment, market participants may be hesitant to display 
liquidity because of the ability to step ahead of wider quotes. 
Therefore, the Commission preliminarily believes that a test group 
should be established to examine this potential impact on displayed 
liquidity in conjunction with Test Group One.\59\ The Commission also 
preliminarily believes that limited exceptions to the trading increment 
should be allowed so as not to prohibit certain categories of trades 
that are broadly beneficial to market participants today. First, 
negotiated trades such as volume-weighted average price trades or time-
weighted average price trades are used to execute a trading strategy 
over volume or time. By their definition, the price to be executed with 
these negotiated trades would not be at the NBBO or a $0.05 
increment.\60\ In addition, retail orders often receive price 
improvement to the benefit of retail investors.\61\ The Commission 
preliminarily believes that preserving retail investors' ability to 
receive price improvement on their orders would limit a potential 
negative impact of the Pilot on costs for retail investors.\62\ The 
Commission preliminarily believes that changing the quoting increment 
and trading increment for Test Group Two could generate useful data on 
the effects of quoting and trading increments on the Pilot Securities.
---------------------------------------------------------------------------

    \59\ A pilot with Test Group Two alone cannot examine the issue. 
A comparison of Test Group Two to Test Group One can test the 
incremental effect of adding trading increments to wider quoting 
increments.
    \60\ The Commission staff has previously stated that, with 
respect to Rule 612 of Regulation NMS a performance target is not 
generally a price subject to Rule 612 as long as it is not used 
analogously to a limit price for ranking or displaying an order. 
However, if the performance target were an explicit impermissible 
sub-penny price and also served as a limit price, then accepting the 
order would be a violation. Similarly, if the customer specifies a 
limit price in addition to the performance target, the limit price 
must meet the requirements of the Rule. Available at ( http://www.sec.gov/divisions/marketreg/subpenny612faq.htm). The negotiated 
trade exception contained herein would be subject to the same 
general principle, i.e., the trades must not be designed to 
explicitly circumvent the trading increment.
    \61\ See e.g., BATS BYX Rule 11.24; Nasdaq Rule 4780; NYSE Rule 
107C; NYSE Arca Equities Rule 7.44; and NYSE MKT Rule 107C.
    \62\ Today, retail investors typically receive price improvement 
on their orders over the NBBO. The Concept Release noted that in 
2009, the eight broker-dealers with significant retail customer 
accounts route nearly 100% of their customer market orders to over-
the-counter market makers for execution. See Concept Release, supra 
note 14. See also Letters from David Weisberger, Executive 
Principal, Two Sigma Securities, dated April 23, 2013 (``As a 
further protection against increased costs, the Commission should 
continue to permit executions at prices between the minimum quoting 
increments. Banning such executions would not only add to the 
complexity of evaluating the pilot's results, but would effectively 
deprive retail and institutional investors of an opportunity to 
receive price improvement.'') to Elizabeth Murphy, Secretary, 
Commission; and Paul Jiganti, Managing Director, Market Structure 
and Client Advocacy, TD Ameritrade dated October 31, 2013 (``If 
there is going to be a tick size pilot program, we recommend that it 
is controlled, limited in scope and time, and one that does not 
compromise the benefits retail customers receive from Regulation 
NMS.'') to the Honorable Mary Jo White, Chair, Commission. But see 
letter from Joseph Saluzzi, Partner, Themis Trading LLC, dated 
November 20, 2013 (recommending that the trading increments under a 
pilot be limited to the bid, the offer or the mid-point between the 
two. ``Allowing internalizers to jump ahead of displayed liquidity 
for de minimis price improvement would continue to discourage 
displayed liquidity and harm the price discovery process.'').
---------------------------------------------------------------------------

     Test Group Three. Pilot Securities in Test Group Three 
would be subject to the same minimum quoting and trading increments 
(and exceptions thereto) as Test Group Two, but in addition would be 
subject to a ``trade-at'' requirement. Generally, a trade-at 
requirement is intended to prevent price matching by a trading center 
not displaying the NBBO. Under a trade-at requirement, a trading center 
that was not displaying the NBBO at the time it received an incoming 
marketable order could: (1) Execute the order with significant price 
improvement (such as the minimum allowable $0.05 increment or the mid-
point between the NBBO),\63\ (2) execute

[[Page 36846]]

the order at the NBBO with significant size improvement if the size of 
the order was of block size \64\, or (3) route intermarket sweep orders 
\65\ to execute against the full displayed size of protected quotations 
at the NBBO and then execute the balance of the order at the NBBO 
price.
---------------------------------------------------------------------------

    \63\ For retail investor orders, trading centers would be 
required to provide the minimum price improvement of 10% of the 
$0.05 tick size as described under Test Group 2.
    \64\ Block size refers to an order that is (1) at least 10,000 
shares or (2) for a quantity of stock having a market value of at 
least $200,000. See Rule 600(b)(9) of Regulation NMS, 17 CFR 
242.600(b)(9).
    \65\ Intermarket sweep orders are exceptions provided in Rule 
611(b)(5) and (6) of Regulation NMS that enable an order router to 
sweep one or more price levels simultaneously at multiple trading 
centers without violating trade-through restrictions. As defined in 
Rule 600(b)(30) of Regulation NMS, intermarket sweep orders must be 
routed to execute against the full displayed size of any protected 
quotation that otherwise would be traded through by the orders. See 
also Responses to Frequently Asked Questions Concerning Rule 611 and 
Rule 610 of Regulation NMS, Question 4.04 (April 4, 2008 Update) 
(available at http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm).
---------------------------------------------------------------------------

    The Commission preliminarily believes that a trade-at requirement 
should be included in the Pilot.\66\ When quoting and trading 
increments are widened in the absence of a trade-at requirement, the 
Commission preliminarily believes there is a possibility trading volume 
could migrate away from ``lit venues''--trading venues that provide 
public pre-trade transparency by displaying the best-priced 
quotations--to ``dark venues'' that do not provide such public pre-
trade price transparency. The percentage of trading volume executed in 
dark venues has increased in recent years. In 2009, trading volume 
executed in dark venues was approximately 25 percent. Today, it is 
approximately 35 percent.\67\ The Commission believes that if trading 
volume in Test Group Two Pilot Securities moves to undisplayed trading 
centers, then including the trade-at requirement in Test Group Three 
could test whether trading remains on lit venues and what impact, if 
any, the migration of trading from lit venues to dark venues would have 
on liquidity and market quality for the Pilot Securities.
---------------------------------------------------------------------------

    \66\ One commenter supports the inclusion of a trade-at 
requirement in a tick pilot. See letter from Christopher Nagy, CEO, 
and David Lauer, President, KOR Group LLC, to Ms. Murphy, 
Commission, dated April 4, 2014.
    \67\ See OTC Trading: Description of Non-ATS OTC Trading in 
National Market System Stocks by Laura Tuttle, March 2014 (available 
at http://www.sec.gov/marketstructure/research/otc_trading_march_2014.pdf); Equity Market Structure Literature Review Part I: Market 
Fragmentation by Staff of the Division of Trading and Markets, 
October 7, 2013 (available at http://www.sec.gov/marketstructure/research/fragmentation-lit-review-100713.pdf); and Alternative 
Trading Systems: Description of ATS Trading in National Market 
System Stocks by Laura Tuttle, October 2013 (available at http://www.sec.gov/marketstructure/research/alternative-trading-systems-march-2014.pdf).
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily believes that the Pilot 
should test whether a trade-at requirement would stem the potential 
migration of trading volume away from these lit venues. The inclusion 
of a trade-at requirement would allow the Commission generate and 
analyze data on the impact of a trade-at requirement in conjunction 
with wider tick sizes. In particular, a comparison of Test Group Three 
to Test Group Two would provide insight into the incremental effects of 
a trade-at requirement.
     SRO Data for the Tick Size Pilot. The Commission 
preliminarily believes that the following data should be collected and 
transmitted to the Commission and made available to the public in an 
agreed-upon format on the frequency noted below. The Commission intends 
to study such data to assess the impact of the changes made under the 
Pilot. The Commission believes that making the data available to the 
public, in an agreed-upon format would facilitate the public's ability 
to assess the impact of the pilot.
     Identification of Pilot Securities. On each day during the 
Pilot, the primary listing exchanges should make publicly available the 
list of stocks included in each Test Group, adjusting for ticker symbol 
changes and relevant corporate actions, as set forth in Annex A.
     Pilot Data. The Commission preliminarily believes that the 
Participants should provide to the Commission the data set forth in 
Annex B or explain in the NMS Plan any data alternatives that would to 
the same extent facilitate the studies of the effect of tick size 
mentioned in this order. All data must be provided in an agreed-upon 
format, on a monthly basis and made publicly available. The data should 
be provided for dates starting six months prior to the Pilot period 
through six months after the end of the Pilot period. The Commission 
intends to study such data to assess the impact of the changes made 
under the Pilot.
     Assessments. The Commission preliminarily believes that 
the Participants, either individually or jointly, should provide to the 
Commission and make publicly available their assessment of the impact 
of the Pilot no later than six months after the end of the Pilot 
Period, as follows:
    A. Assess the statistical and economic impact of an increase in the 
quoting increment on market quality.
    B. Assess the statistical and economic impact of an increase in the 
quoting increment on the number of market makers.\68\
---------------------------------------------------------------------------

    \68\ The term ``market makers'' includes all registered market 
makers and other registered liquidity providers.
---------------------------------------------------------------------------

    C. Assess the statistical and economic impact of an increase in the 
quoting increment on market maker participation.
    D. Assess the statistical and economic impact of an increase in the 
quoting increment on market maker profits.
    E. Assess the statistical and economic impact of an increase in the 
quoting increment on market transparency.
    F. Evaluate whether any thresholds can differentiate the results of 
the above assessments across stocks (e.g., whether stocks above the 
threshold have negative effects while stocks below the threshold have 
positive effects).
    G. Assess the statistical and economic impact of the above 
assessments for the incremental impact of a trading increment and for 
the joint effect of an increase in a quoting increment with the 
addition of a trading increment.
    H. Assess the statistical and economic impact of the above 
assessments for the incremental impact of a trade-at rule and for the 
joint effect of an increase in a quoting increment with the addition of 
a trading increment and a trade-at rule.
    I. Assess any other economic issues that the Participants believe 
the Commission should consider in any rulemaking that may follow the 
Pilot.
    It is hereby ordered, pursuant to Section 11A(a)(3)(B) of the 
Act,\69\ that the Participants act jointly in developing and filing 
with the Commission, as an NMS plan pursuant to Rule 608(a) of 
Regulation NMS,\70\ a Tick Size Pilot Plan, as described above. The 
Participants are ordered to file with the Commission such Tick Size 
Pilot Plan no later than August 25, 2014.
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78k-1(a)(3)(B).
    \70\ 17 CFR 242.608(a).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.

Annex A

    These datasets can include additional fields as agreed upon by the 
Participants.
    1. A dataset identifying pilot stocks containing the following 
fields in a pipe delimited format with the field names as the first 
record. The SROs should use consistent file name formats.

(a) Ticker Symbol
(b) Security Name
(c) Listing Exchange
(d) Date
(e) Tick Size Pilot Group--character value of

[[Page 36847]]

    (1) ``C'' for stocks in the Control Group
    (2) ``G1'' for stocks in Test Group One
    (3) ``G2'' for stocks in Test Group Two
    (4) ``G3'' for stocks in Test Group Three

    2. A dataset that identifies changes in the pilot ticker symbols on 
that day containing the following fields and in a pipe delimited format 
with field names as the first record. The SROs should use consistent 
file name formats.

(a) Ticker Symbol
(b) Security Name
(c) Listing Exchange
(d) Effective Date
(e) Deleted Date
(f) Tick Size Pilot Group--character value of
    (1) ``C'' for stocks in the Control Group
    (2) ``G1'' for stocks in Test Group One
    (3) ``G2'' for stocks in Test Group Two
    (4) ``G3'' for stocks in Test Group Three
(g) Old Ticker Symbol(s)
(f) Reason for the change--character value agreed upon by SROs

Annex B

    These datasets can include additional fields as agreed upon by the 
SROs. The data need only include stocks meeting the thresholds for 
inclusion in one of the three Test Groups and the Control Group as of 
the date of selection.
    A dataset of daily market quality statistics of orders by security, 
order type, original order size (as observed by SRO), hidden status, 
and coverage under Rule 605 in a pipe delimited format with field names 
as the first record:
    1. Minimum Fields: Same as Rule 605 fields, except as modified 
below, and, as defined below, Rule 605 Coverage, Hidden Status, 
Original Percentage Hidden, and Final Percentage Hidden.
    2. The SRO should include only orders executed on their exchanges 
(or OTC in the case of FINRA).
    3. The order size should be the original order size as observed by 
the SRO.
    4. Modified order size categories (slightly different than Rule 
605): Less than 100, 100 to 499 shares, 500 to 1999 shares, 2000 to 
4999 shares, 5000 to 9999 shares, and 10000 or greater shares.
    5. Modified execution speed categories include: Orders executed 
from 0 to <100 microseconds, 100 microseconds to <100 milliseconds, 100 
milliseconds to <1 second, 1 second to <30 seconds, 30 seconds to <60 
seconds, 60 seconds to <5 minutes, 5 minutes to 30 minutes.
    6. Hidden status should include orders for which the instructions 
indicate that the order is not displayable in part or full.
    (a) Hidden status is a character variable with the values 
``entirely displayable,'' ``partially displayable,'' and ``not 
displayable'' or other values as agreed upon by the SROs.
    (b) Original Percentage Hidden is the percentage of shares not 
displayable as of order receipt, regardless of its placement relative 
to the quotes. For example, a buy order for 5000 shares with an 
instruction to not display 4000 shares would be 80% hidden regardless 
of whether it is greater than or less than the bid price.
    (c) Final Percentage Hidden is the percentage of shares not 
displayed prior to final order execution or cancellations. For example, 
suppose a buy order for 5000 shares with an instruction to display not 
more than 1000 shares at a time. After the first 1000 shares execute a 
second 1000 is displayed. If the order is cancelled before any more 
executions, the final percentage hidden is 60%.
    7. Orders to include: Market orders, marketable limit orders, 
inside-the-quote limit orders, at-the-quote limit orders, near-the-
quote limit orders, and intermarket sweep orders (ISOs), including 
those not covered by Rule 605.
    8. Rule 605 coverage: Indicate whether the order is covered in Rule 
605 (``Yes'') or reason for not covered (character variable with the 
consistent values across SROs such as ``opening'', ``closing'', ``stop 
price'', ``full size'', ``short sale'', ``other tick/bid sensitive'', 
``not held'', ``special settlement'', ``non-market,'' ``order size 
>10,000'', or other values as agreed upon by SROs).
    A dataset of daily number of registered market makers \71\ by 
security in a pipe delimited format with field names as the first 
record:
---------------------------------------------------------------------------

    \71\ The term ``market makers'' includes all registered market 
makers and other registered liquidity providers.
---------------------------------------------------------------------------

    1. Minimum fields: SRO, number of registered market makers, number 
of other registered liquidity suppliers.
    A dataset of daily market maker participation and trading profits 
of orders by security in a pipe delimited format with field names as 
the first record:
    1. Minimum fields: SRO, total market maker share participation, 
total market maker trade participation, cross-quote market maker share 
participation, cross-quote market maker trade participation, inside-
the-quote market maker share participation, inside-the-quote market 
maker trade participation, at-the-quote market maker share 
participation, at-the-quote market maker trade participation, outside-
the-quote market maker share participation, outside-the-quote market 
maker trade participation, raw market maker realized trading profits, 
market maker realized trading profits net of fees and rebates, raw 
market maker unrealized trading profits.
    2. Participation fields:
    (a) Share participation: The number of shares purchased or sold by 
market makers in a principal trade, not including riskless principal. 
When aggregating across market makers, this should be a share-weighted 
average per market maker.
    (b) Trade participation: The number of purchases and sales by 
market makers in a principal trade, not including riskless principal. 
When aggregating across market makers, this should be a trade-weighted 
average per market maker.
    (c) Cross-quote participation refers to the market maker buying at 
or above the national best offer or selling at or below the national 
best bid at the time of the trade.
    (d) Inside-the-quote participation refers to a trade price that is 
between the national best bid and offer prices at the time of the 
trade.
    (e) At-the-quote (outside-the-quote) participation refers to a buy 
price that is equal to (less than) the national best bid price at the 
time of or immediately before the trade. In the case of downward moving 
national best bid, use the national best bid price immediately before 
the trade. Otherwise, use the national best bid price at the time of 
trade. For a sell price, use the same method with the national best 
offer price.
    3. Trading profit fields:
    (a) Realized trading profits are the difference between the market 
value of market maker sales (shares sold x price) and the market value 
of market maker purchases (shares purchased x price). Use a LIFO-like 
method for determining which share prices to use in the calculation. 
When aggregating across market makers, this should be a share-weighted 
average per market maker.
    (b) Realized trading profits net of fees and rebates are the 
realized trading profits plus rebates the market maker collects from 
trading on that day minus access fees the market maker pays for trading 
on that day. If estimated before allocations of rebates and fees, use 
expected rebates and fees.
    (c) Unrealized trading profits are the difference between the 
purchase or sale price of the end-of-day inventory position of the 
market maker and the official closing price. In the case of a

[[Page 36848]]

short position, subtract the closing price from the sale price. In the 
case of a long position, subtract the purchase price from the closing 
price.
    A dataset of market orders and marketable limit orders in a pipe 
delimited format with field names as the first record.
    1. Minimum fields: Ticker symbol, date, order receipt time, order 
type, order size in shares, order side (``B'', ``S'', or ``SS''), order 
price (if marketable limit), NB quoted price, NB quoted depth in lots, 
receiving market offer for buy or bid for sell, receiving market depth 
(offer for buy and bid for sell), indicator for quote leader, average 
execution price (share-weighted), executed shares, canceled shares, 
routed shares, routed average execution price (share-weighted), 
indicator for special handling instructions.
    2. Quote variables:
    (a) NB quoted price is the national best offer for buys and the 
national best bid for sells.
    (b) NB quoted depth is the NBO depth for buys and NBB depth for 
sells.
    (c) The indicator for quote leader is 1 if the receiving market was 
the first market to post the NBB for a sell or NBO for a buy.
    3. Average execution price is a share-weighted average that 
includes only executions on the receiving market. Routed average 
execution price is a share-weighted average that includes only shares 
routed away from the receiving market.
    4. Routed shares refers to the number of shares in the order that 
were routed to another exchange or market.
    5. The indicator for special handling instructions should identify 
orders that contain instructions that could result in delayed execution 
or an execution price other than the quote.
[FR Doc. 2014-15205 Filed 6-27-14; 8:45 am]
BILLING CODE 8011-01-P


