Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054 Page: 46,999
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Federal Register/Vol. 76, No. 149 /Wednesday, August 3, 2011 /Rules and Regulations
competition or impact efficiency,
competition, and capital formation.414
The comment is addressed as part of the
In the Proposing Release, the
Commission considered the impact of
proposed new Rule 13h-1 on the
securities markets and market
participants. Information provided by
market participants and broker-dealers
in their registrations and filings with us
informs our views on the structure of
the markets in which they participate.
We begin our consideration of potential
competitive impacts with observations
of the current structure of these markets.
The securities trading industry is a
competitive one with reasonably low
barriers to entry. The intensity of
competition across trading platforms in
this industry has increased in the past
decade as a result of a number of factors,
including market reforms and
technological advances. This increase in
competition has resulted in decreases in
market concentration, more competition
among trading centers, a proliferation of
trading platforms competing for order
flow, and decreases in trading fees.
The reasonably low barriers to entry
for trading centers are evidenced, in
part, by the fact that new entities,
primarily ATSs, continue to enter the
market.415 For example, there are
approximately 40 registered ATSs that
trade NMS securities. In addition, the
Commission within the past few years
has approved applications by two
entities-BATS Exchange, Inc. and
NASDAQ Stock Market LLC-to become
registered as national securities
exchanges for trading equities, and
approved proposed rule changes by two
Securities Exchange, LLC ("ISE") and
Chicago Board Options Exchange,
Incorporated-to add equity trading
facilities to their existing options
business.416 Moreover, on March 12,
2010, Direct Edge received approval
from the Commission for its trading
platforms to operate as facilities of two
newly created national securities
exchanges.417 We believe that
414 See European Banking Federation and Swiss
Bankers Association Letter.
45 See Securities Exchange Act Release No.
60997 (Nov. 13, 2009), 74 FR 61208, 61234 (Nov.
23, 2009) (discussing the reasonably low barriers to
entry for ATSs and that these reasonably low
barriers to entry have generally helped to promote
competition and efficiency).
416 The ISE discontinued its equities platform in
2010. See Press Release, Direct Edge, available at
41 See Securities Exchange Act Release No.
61698 (March 12, 2010), 75 FR 13151 (March 18,
competition among trading centers has
been facilitated by Rule 611 of
Regulation NMS,418 which encourages
quote-based competition between
trading centers; Rule 605 of Regulation
NMS,419 which empowers investors and
broker-dealers to compare execution
quality statistics across trading centers;
and Rule 606 of Regulation NMS,420
which enables customers to monitor
their broker-dealers' order routing
Broker-dealers are required to register
with the Commission and at least one
SRO. The broker-dealer industry,
including market makers, is a
competitive industry with most trading
activity concentrated among several
larger participants and thousands of
smaller participants competing for niche
or regional segments of the market.
There are approximately 5,035
registered broker-dealers, of which
approximately 862 are small broker-
Larger broker-dealers often enjoy
economies of scale over smaller broker-
dealers and compete with each other to
service the smaller broker-dealers, who
are both their competitors and their
As discussed above, the Commission
acknowledges that the Rule will entail
costs. In particular, requiring registered
broker-dealers to establish
recordkeeping systems to capture the
required information, in particular the
new fields that are not currently
captured under the existing EBS system,
will require one-time initial expenses,
as discussed above. In addition,
registered broker-dealers will need to
implement policies and procedures to
monitor their customers' trading in
order to determine whether customers'
trades would trigger the threshold for
large trader status. The Commission
does not believe that these expenses
would adversely affect competition.
In our judgment, the costs of
complying with Rule 13h-1 would not
be so large as to significantly raise
barriers to entry, or otherwise alter the
competitive landscape of the industries
involved because the incremental costs
of Rule 13h-1 that would be incurred by
broker-dealers would be marginal
relative to the costs of complying with
the existing EBS system.422 In industries
41817 CFR 242.611.
41917 CFR 242.605.
420 17 CFR 242.606.
421 These numbers are based on a review of 2009
FOCUS Report filings reflecting registered broker-
dealers, and discussions with SRO staff. These
numbers do not include broker-dealers that are
delinquent on FOCUS Report filings.
422 See supra Sections IV (Paperwork Reduction
Act) and V (Consideration of Costs and Benefits) for
a detailed description of the expected costs.
characterized by reasonably low barriers
to entry and competition, the viability of
some of the less successful competitors
may be sensitive to regulatory costs.
Nonetheless, we believe that the broker-
dealer industry would remain
competitive, despite the costs associated
with implementing new Rule 13h-1,
even if those costs influence the entry
or exit decisions of individual broker-
dealer firms at the margin.
The Commission does not expect that
the costs associated with new Rule
13h-1, which are marginal relative to
the costs of complying with the existing
EBS system, would be a determining
factor in a broker-dealer's entry or exit
decision or decision to accept large
trader customers because the volume of
trading associated with large traders and
resultant revenue that could be gained
by servicing a large trader would justify
the costs associated with the Rule.
Further, the Commission would not
be compelled to disclose publicly any
information required to be kept or
reported under Section 13(h) of the
Exchange Act, including information
kept or reported pursuant to Rule 13h-
1.423 Information and trading data that
the Commission would obtain pursuant
to the Rule would not be shared with
others and would not be available to
other large traders or broker-dealers.
Accordingly, because the large trader
transaction data will be reported only to
the Commission, and not made publicly
available for use by a large trader's
customers or competitors, the
Commission expects the Rule to have
little to no impact on competition.
The approach of new Rule 13h-1 will
advance the purposes of the Exchange
Act in a number of significant ways. The
Commission believes that the large
trader reporting rule will enhance its
ability to identify large traders and
collect trading data on their activity at
a time when, for example, many such
traders employ rapid algorithmic
systems that quote and trade in huge
volumes. The large trader reporting rule
will provide a useful source of data to
facilitate the ability of the Commission
to monitor and analyze more readily
and efficiently the impact of large
traders, including high-frequency
traders, on the securities markets.
Although, as noted above, several
commenters stated that the Commission
underestimated the costs of the
proposed rule,424 the Commission has
made several modifications to the Rule
to reduce reporting burdens. The
Commission believes that establishing
the large trader reporting rule would not
423 See supra Section III.A.3.g.
424 See supra Section V.B.
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United States. Office of the Federal Register. Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054, periodical, August 3, 2011; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc52326/m1/411/: accessed April 29, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.