[00:00:02] Speaker 02:
Case number 19S1042NL, New York Stock Exchange, LLC, NL Petitioners vs. Securities and Exchange Commission.

[00:00:10] Speaker 02:
Mr. Hungar for the petitioners, Ms.

[00:00:11] Speaker 02:
Harden for the respondent.

[00:00:14] Speaker 02:
Morning, Mr. Hungar.

[00:00:16] Speaker 00:
Thank you, Your Honor, and may it please the Court.

[00:00:19] Speaker 00:
The Commission's an exogenous shock on the securities market that admittedly threatens to harm investors, reduce liquidity, and unfairly tilt the competitive playing field

[00:00:30] Speaker 00:
in a way that harms exchanges and benefits off-exchange, dark venues, all without advancing any of the objectives of the Exchange Act.

[00:00:39] Speaker 00:
The Commission didn't even find that its new rule will do more good than harm.

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nor did it conclude that the information it hopes to obtain from this reckless experiment will actually benefit investors, strengthen the market, or promote the purposes of the Exchange Act.

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The Commission is acting like a doctor who subjects his patient to a risky open-heart surgery without first using all of the available diagnostic tools to find out whether there's anything wrong

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and without knowing whether any good will come of the risky experiment.

[00:01:12] Speaker 00:
The rule is unlawful and should be vacated.

[00:01:16] Speaker 00:
Section 11AA of the Exchange Act requires the Commission to exercise its rulemaking authority in a manner that carries out the objectives specified by Congress.

[00:01:27] Speaker 00:
Even the Commission concedes, at page 29 of its brief, that it must explain how its rule furthers Congress's objectives.

[00:01:36] Speaker 00:
And yet, nowhere in its adopting release did the Commission even purport to find that its new rule will protect investors, achieve fair and orderly markets, or promote efficiency, competition, or any of the objectives stated by Congress in Section 11A.

[00:01:52] Speaker 05:
Well, the purpose of it is to get data.

[00:01:53] Speaker 05:
Are you saying that's an impermissible purpose under the APA?

[00:01:57] Speaker 05:
I mean, they're frank in acknowledging they can't give you what you're crying for.

[00:02:04] Speaker 05:
which is a perfect prediction because they're trying to get information to make a perfect prediction.

[00:02:10] Speaker 05:
It's a time-limited rule.

[00:02:11] Speaker 05:
And the question is whether, under the APA, where it's not forbidden by the statute, whether an agency has authority to engage in this kind of an investigation to be able to secure the data they need to achieve the ends of the statute.

[00:02:29] Speaker 05:
That's what they're intending to do.

[00:02:31] Speaker 05:
So I'm not sure I'm understanding, are you saying that is absolutely forbidden under the APA or what?

[00:02:37] Speaker 00:
If an agency is able, in keeping with the statutory prerequisites for rulemaking, to engage in an experiment that will further, that it predicts reasonably based on the record, will further the purposes of the act.

[00:02:47] Speaker 05:
Well, the prediction is we'll get data that will allow us to make informed judgments.

[00:02:52] Speaker 05:
That's the prediction.

[00:02:54] Speaker 05:
That's what this really comes down to.

[00:02:55] Speaker 05:
Is that permissible or not?

[00:02:57] Speaker 06:
It's not permissible if the agency can't comply with the requirements of the Act necessary before it imposes a... I don't know if that would be your position that using the words exploratory or pilot, it does not give an agency a free pass to get out of APA free, as one of my colleagues wrote in a different context.

[00:03:22] Speaker 06:
That's absolutely right.

[00:03:31] Speaker 00:
Exactly right, because the Exchange Act doesn't give the Commission a free pass to evade the requirements of the statute.

[00:03:38] Speaker 06:
When you're looking at the case use that are cited by the agency, your position would be the question is not whether it's forbidden by the APA, but whether it is freshly permitted by the APA to depart from the usual requirements

[00:03:53] Speaker 06:
of rulemaking in order to do an exploratory, right?

[00:03:56] Speaker 06:
Precisely, Your Honor.

[00:03:57] Speaker 06:
In some agencies, there are statutes, like the one that's coming up in the next case, where the statute quickly gives the right to make a pilot or exploratory program, or the FERC and the FCC in prior cases.

[00:04:09] Speaker 06:
So that we might assume that when Congress doesn't give that authority, they don't have that authority, right?

[00:04:14] Speaker 06:
Exactly right.

[00:04:15] Speaker 05:
Is that your position?

[00:04:16] Speaker 05:
Absent explicit authority, a pilot program is forbidden?

[00:04:20] Speaker 00:
No, Your Honor.

[00:04:20] Speaker 00:
No, Your Honor.

[00:04:21] Speaker 05:
I'm missing your point.

[00:04:23] Speaker 05:
What's your point?

[00:04:24] Speaker 00:
The Exchange Act authorizes the Commission to issue rules.

[00:04:28] Speaker 00:
All right.

[00:04:29] Speaker 00:
if it complies with various stated requirements, such as it must find that the rule in this context under Section 11A, as the Commission concedes, will carry out the objectives stated by Congress in 11A, protect investors, enhance market efficiency, provide fair competition, the various objectives stated.

[00:04:47] Speaker 05:
And if you're trying to get data to better do all of those things, that's impermissible?

[00:04:52] Speaker 00:
It's not impermissible necessarily.

[00:04:54] Speaker 00:
It's permissible if the agency could say, for example, if the commission had been able to say, and the record supported it, and it provided a reasonable explanation that said, we think that proceeding down this road of changing the regulatory requirements that we previously imposed in this manner is, we predict, it's more likely than not to provide the following benefits that Congress has articulated in the statute that we're supposed to further.

[00:05:18] Speaker 05:
Well, in one of our circles, they said, we think it's more likely than not that we will get data

[00:05:23] Speaker 05:
that will allow us to do precisely what the statute requires us to do.

[00:05:29] Speaker 05:
That's what they said.

[00:05:30] Speaker 00:
With respect, Your Honor, they didn't say that.

[00:05:32] Speaker 00:
If they had said that, we would be having a different conversation.

[00:05:34] Speaker 00:
But what they actually said at page 77 of the joint appendix is that we cannot predict whether the results of the rule will suggest any particular policy direction, and the results could suggest that existing approaches may be more beneficial to investors.

[00:05:48] Speaker 05:
That's exactly right.

[00:05:50] Speaker 05:
They're trying to determine whether or not

[00:05:52] Speaker 05:
the status quo is where they ought to be and how do you do that without data?

[00:05:57] Speaker 05:
And using your medical examination, sometimes you do exploratory surgery and the patient knows the best we can do right now is exploratory surgery because we're not precisely sure and so we need to take a look.

[00:06:10] Speaker 05:
And if it were not time limited, I could understand your argument better.

[00:06:16] Speaker 05:
I'm just trying to figure out where you give them any room at all to try and get the information they need to meet the statutory requirements.

[00:06:27] Speaker 00:
If the commission has said, we predict, and if the record supported this prediction, that objectives A, B, and C articulated by Congress in the statute are likely to be furthered as a result of this program, we would be having a very different conversation.

[00:06:43] Speaker 00:
They did not say that.

[00:06:45] Speaker 03:
It's interesting, Mr. Hunger, because in a way, you're faulting them for their neutrality.

[00:06:51] Speaker 03:
You know, it's true that when we're doing research, we typically have a hypothesis.

[00:06:55] Speaker 03:
And I would say reading the record that the commission's hypothesis is that the maker-taker system is not good for the markets and for investors.

[00:07:06] Speaker 03:
But instead of saying we're going to, you know,

[00:07:10] Speaker 03:
tell you, put our finger on the scale in support of that evidence, they're saying, look, we're not going to prejudge this.

[00:07:17] Speaker 03:
It's possible.

[00:07:18] Speaker 03:
And I guess the tick pricing, they did a pilot and they thought, well, maybe not.

[00:07:23] Speaker 03:
It's possible that this will put to rest the concerns we have.

[00:07:29] Speaker 03:
It's possible it will substantiate those concerns.

[00:07:31] Speaker 03:
So it almost feels like you're pushing them off of neutrality.

[00:07:37] Speaker 03:
And I'm just not sure.

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why that would make them more in compliance with their statutory obligation?

[00:07:44] Speaker 00:
Well, a couple of responses.

[00:07:45] Speaker 00:
I don't think they have stated the hypothesis that you're on or suggested.

[00:07:49] Speaker 00:
They clearly say, we don't know whether there's a problem.

[00:07:51] Speaker 03:
Well, the reason this is coming up is because there's a lot of research and a lot of clamoring that's concerned that these markets are causing, disadvantaging certain

[00:08:07] Speaker 03:
clients that shouldn't be suffering.

[00:08:09] Speaker 00:
There's a lot of clamoring.

[00:08:10] Speaker 00:
The Commission was unpersuaded by the research and questioned its accuracy or its probative value because of limitations on the studies that have actually been done.

[00:08:18] Speaker 00:
But first of all, as I said, the fact that the Commission thinks there's a question doesn't allow it to issue rules that threaten to harm the very markets that they're supposed to protect unless they can... So would you say that at the point at which a rulemaking is made neutrality is not a virtue?

[00:08:33] Speaker 06:
The APA contemplates that the Commission will have its mind made up when it makes a rule and imposes regulation on an industry, rather than that it's still neutral.

[00:08:44] Speaker 06:
And here they're imposing the obligations of a rule when they don't know whether it's good or bad, right?

[00:08:49] Speaker 00:
That's right.

[00:08:50] Speaker 00:
At the very least, the agency has to be able to predict, with support in the record and reasoned decision-making,

[00:08:56] Speaker 05:
that what he's doing is going to do more good than harm.

[00:09:09] Speaker 05:
X will happen.

[00:09:11] Speaker 05:
Agencies have to have more room than that.

[00:09:13] Speaker 05:
They cannot always predict with certainty that a certain result will follow.

[00:09:18] Speaker 05:
That is not the AP.

[00:09:19] Speaker 00:
I agree, Your Honor.

[00:09:20] Speaker 00:
I'm not saying they have to predict with certainty, but they have to at least think that it's more likely than not to do good.

[00:09:25] Speaker 03:
But it's curious because one of the very, as you know, given the clients you represent, one of the very important interests that the commission protects is confidence in the exchanges.

[00:09:38] Speaker 03:
And if there is

[00:09:40] Speaker 03:
the substantial research, even if the commission questions it, it seems like it is in the interests of all the different stakeholders here to clear the air.

[00:09:52] Speaker 03:
Maybe they'll have a study, and they'll say, look, we really looked into this.

[00:09:55] Speaker 03:
We did the best design we could.

[00:09:57] Speaker 03:
And guess what?

[00:09:59] Speaker 03:
Maker-taker is not a problem.

[00:10:01] Speaker 03:
And that would be a benefit to

[00:10:05] Speaker 03:
all of the stakeholders know?

[00:10:06] Speaker 03:
I mean, if that's really the position that they're in, they can't do that?

[00:10:12] Speaker 03:
They can't satisfy the public?

[00:10:14] Speaker 00:
Two responses.

[00:10:14] Speaker 00:
First of all, I think the answer is no, they can't.

[00:10:16] Speaker 00:
If they can't predict any good's going to come, and if they admit.

[00:10:19] Speaker 03:
But the good is answering the question.

[00:10:21] Speaker 03:
The good is not.

[00:10:23] Speaker 03:
And so coming into it with an open mind and saying, we hear you.

[00:10:27] Speaker 03:
We hear you.

[00:10:27] Speaker 03:
We're going to do something that we think is neutral.

[00:10:30] Speaker 03:
We're going to come up with data on which we're going to make the substantive decision.

[00:10:35] Speaker 03:
is having a hypothesis of how that relates to the public good, no?

[00:10:39] Speaker 00:
Answering an abstract question that doesn't actually achieve any of the objectives of the Act is not permissible, but I have a second answer if I may get to it, which is even if that were true, and we don't at all concede that it is, that they can impose regulatory burdens and threaten the market without explaining how some good is going to come of it, even if they could do that,

[00:10:59] Speaker 00:
At the very least, they would need to have exhausted all the non-harmful methods, all the methods that don't threaten investors, and they admit they haven't done it.

[00:11:09] Speaker 00:
For instance, with respect to the competitive harms that they threaten to impose, they said, well, we couldn't assess those.

[00:11:16] Speaker 00:
Why couldn't we assess them?

[00:11:17] Speaker 00:
Because we don't have information.

[00:11:18] Speaker 00:
such as, we lack data on the current pricing schedules offered by off-exchange venues.

[00:11:23] Speaker 00:
We lack data on routing decisions of broker-dealers.

[00:11:25] Speaker 00:
We lack data on how difficult it is for off-exchange trading venues to adjust their pricing schedules.

[00:11:30] Speaker 00:
This is at page 100.

[00:11:31] Speaker 00:
They also, with respect to broker-dealer competition, they lack sufficient data on the differences on commission rates between large and small broker-dealers.

[00:11:39] Speaker 00:
That's at page 105.

[00:11:40] Speaker 00:
Similarly, with respect to conflict of interest by brokers, pages 70 and 71, and ATSs, they lack information on routing, ATS routing tables and so forth, and also page 107 of the Joint Appendix with respect to capital formation.

[00:11:57] Speaker 00:
All these things, they lack data.

[00:11:58] Speaker 00:
The Commission has comprehensive authority under Section 17B of the Exchange Act and its regulations

[00:12:05] Speaker 00:
to demand that information from brokers at their whim.

[00:12:08] Speaker 00:
All they have to do is say to the regulated entities, the ATSs and the broker dealers, give us your routing tables, tell us what you're doing, show us how you decide where to send orders.

[00:12:17] Speaker 00:
And we will then know, are you acting on the basis of conflict of interest to the detriment of your customers, or are you instead doing what you're supposed to do, which is acting for their benefit?

[00:12:26] Speaker 00:
The Commission refused to ask for that information, and instead they want to impose these threatened harms on investors.

[00:12:32] Speaker 00:
The tick-size pilot alone, according to the Albuquerque study, which the Commission refused to credit,

[00:12:38] Speaker 00:
without any basis, the Albuquerque study found $6 billion in investment losses from the tick-sized pilot alone, and the order of magnitude of this impact on the market is at least ten times as great.

[00:12:51] Speaker 06:
You would say that the commission is correct in its brief when it says that before making a rule, and I put the words in myself before making a rule, but I'm quoting their brief,

[00:13:02] Speaker 06:
the Commission must explain its conclusion that a rule furthered Congress's objection and its reasons for believing that the more good than harm will come of its action.

[00:13:16] Speaker 06:
Yes, Your Honor.

[00:13:16] Speaker 06:
And that applies even if they use the word exploratory or pilot or something other.

[00:13:21] Speaker 06:
Yes, Your Honor.

[00:13:21] Speaker 06:
It's still a rule.

[00:13:22] Speaker 06:
It still has to meet the rulemaking requirements.

[00:13:24] Speaker 00:
Absolutely.

[00:13:24] Speaker 00:
In Section 23.

[00:13:25] Speaker 06:
They're right about that.

[00:13:26] Speaker 06:
They're just ignoring their own policy and statutes when they

[00:13:31] Speaker 00:
There's no experimental exception and if there were, if this court were to hold in this case that the Commission can get away with what it's doing here without having predicted that any of the stated statutory objectives will be furthered, you've driven a huge truck through the APA because it's always true that a new rule will provide more information about how that rule affects the regulated market.

[00:13:52] Speaker 00:
So if an agency can say,

[00:13:54] Speaker 00:
Well, we have no idea if it's actually going to further any of the objectives of the statute.

[00:13:57] Speaker 00:
That's what we want to find out.

[00:13:59] Speaker 00:
So let's experiment and think and do whatever we think works.

[00:14:01] Speaker 05:
We're starting with the premise that there is an existing problem, which at least my reading indicates that that's true.

[00:14:08] Speaker 05:
Well, every agency says that.

[00:14:09] Speaker 05:
No, no.

[00:14:10] Speaker 05:
I'm talking about this context.

[00:14:12] Speaker 05:
I don't know about every agency.

[00:14:14] Speaker 05:
I'm talking about what I've read in this case about this context.

[00:14:18] Speaker 05:
It is mostly agreed by all the players, even though there are people on both sides of it, that there are some serious issues that have to be addressed.

[00:14:28] Speaker 05:
Oh, you say there are no problems, that the markets are all working... It is not agreed that there are problems.

[00:14:34] Speaker 00:
I agree there's a dispute about that, but it's certainly not agreed.

[00:14:37] Speaker 05:
In fact, there's substantial evidence that the maker-taker... Well, that's what I'm saying, is that people agree there is a significant, serious dispute over whether the market is working the way the statute

[00:14:48] Speaker 05:
And that alone is bad for the market.

[00:14:52] Speaker 03:
That alone.

[00:14:53] Speaker 03:
And therefore, isn't it within the commission's remit to do something that it believes will help to settle that

[00:15:06] Speaker 00:
I don't think that's a rationale stated by the Commission in this decision.

[00:15:09] Speaker 00:
I don't think they say we're advancing, what, protection of investors because uncertainty about whether this is a problem is causing harm to investors.

[00:15:17] Speaker 00:
I don't think that's their rationale, their stated rationale for the decision.

[00:15:20] Speaker 00:
Again, you can read these of analysis, but nowhere do they actually go through the statutory process of saying, well, yes, this objective of the act is being furthered, this objective isn't.

[00:15:29] Speaker 00:
In fact, they admit all the objectives, all the stated objectives set forth in the statute, protection of investors,

[00:15:35] Speaker 00:
They admit investors may be harmed by this.

[00:15:38] Speaker 00:
Securities transactions, they admit efficiency may be harmed by this.

[00:15:42] Speaker 00:
Fair competition, they admit competition may be harmed by this.

[00:15:46] Speaker 00:
Capital formation being the only exception.

[00:15:48] Speaker 00:
But all the other, with respect to capital formation, the most they can say is, well, we don't think it's going to be affected, which is arbitrary and capricious because it rests on the view that their theory, their academic theory, which has no support in the record, trumps empirical evidence to the contrary.

[00:16:03] Speaker 00:
But there is no finding with respect to any of the statutory objectives that any of them are going to be furthered by answering this question.

[00:16:08] Speaker 00:
And if there were, we would be having a different discussion.

[00:16:12] Speaker 00:
You can't let an agency get away with saying, we have no idea whether any of our statutory objectives are going to be furthered, but we just want to find out.

[00:16:19] Speaker 03:
Is it your position that, in light of risk of harm, that the agency can never do an investigation or investigatory rule like this, where there is some quantum of risk of harm to some of the interests?

[00:16:36] Speaker 00:
Not at all, Your Honor.

[00:16:38] Speaker 03:
Where do we draw the line?

[00:16:39] Speaker 03:
How do we know how much risk is too much?

[00:16:41] Speaker 00:
Well, that's the agency's job.

[00:16:42] Speaker 00:
But the agency has to say, number one, what the agency has to say is, yes, there are risks.

[00:16:47] Speaker 00:
But on balance, we think something good is going to come of this.

[00:16:50] Speaker 00:
They have to be willing to put themselves on the line to that extent, to say something we think, we can't be sure, we think something good is going to come of this.

[00:16:59] Speaker 00:
And in every one of the experimental cases that the agency relies on, that was true.

[00:17:03] Speaker 00:
The agency said, of course, we don't know.

[00:17:06] Speaker 00:
But we're going to go down this road.

[00:17:07] Speaker 00:
We think it's going to be better, and the experiment will allow us to confirm that or learn that it's not true, and then we'll make a further regulatory decision on the basis of that.

[00:17:16] Speaker 00:
But at least the agency was doing its job, making a prediction, saying this is our best estimate of the likely outcome here.

[00:17:24] Speaker 00:
We think it's a benefit.

[00:17:26] Speaker 00:
If it proves not to be based on the results of this experiment, we'll come up with a different approach.

[00:17:29] Speaker 00:
But the agency here was unwilling to say that.

[00:17:35] Speaker 00:
Thank you.

[00:17:47] Speaker 01:
Good morning, Your Honor.

[00:17:48] Speaker 01:
Tracy Harden on behalf of the Securities and Exchange Commission.

[00:17:52] Speaker 01:
At the outset, I want to make clear precisely what the Commission did conclude here.

[00:17:57] Speaker 01:
It concluded specifically in the release that engaging in this pilot to gather this necessary data would further the purposes of the Exchange Act.

[00:18:07] Speaker 01:
That's at page 57 of the appendix.

[00:18:10] Speaker 01:
It found at page 21 of the appendix that engaging this pilot would enable it to carry out Congress's objectives.

[00:18:19] Speaker 06:
Now, you say it's able to carry out Congress's objectives, but you're making a rule here.

[00:18:24] Speaker 06:
Now, if you didn't have that word experiment in there or pilot or a timeline or something, it still would be a rule that compels certain behaviors or forbids certain behaviors while it's in effect, right?

[00:18:40] Speaker 01:
That's correct, Your Honor.

[00:18:42] Speaker 06:
Does the Commission, anywhere in the opinion, give us the foundation we normally look for, for the conclusion and the facts that support it, that this rule that you've made, or the Commission's made, will do, as your brief says, more good than harm?

[00:18:59] Speaker 01:
Your Honor, what the Commission said with respect to each of the test groups here, with respect to the FECAP test group, the Commission specifically said that the information gathered through that- The information gathered.

[00:19:10] Speaker 06:
The information gathered would- I'm talking about the rule itself.

[00:19:12] Speaker 06:
I'm talking about- I'm true.

[00:19:14] Speaker 06:
Yes.

[00:19:14] Speaker 06:
I'm talking about the rule itself.

[00:19:16] Speaker 06:
Is there anything in there that says this rule is going- in fact, it says we don't know whether the rule would be more harm than good, right?

[00:19:25] Speaker 01:
It said that it couldn't make an ultimate prediction as to whether the economic costs here would be incurred or whether there would in fact be temporary economic benefits.

[00:19:35] Speaker 06:
Now, could you possibly defend that rule if you didn't have the description of it as information gathering or experimental, if you just had the rule compelling making changes in behavior of the regulated entities?

[00:19:47] Speaker 06:
Could you possibly defend that?

[00:19:48] Speaker 01:
I think there would certainly be a more difficult case, but that's precisely why the Commission is engaging in the pilot it's engaging in, and it found that... The fact that this will give you information, if not by itself an objective of statute, right?

[00:20:02] Speaker 06:
It is not an objective of the statute, but... And you do not have in this statute the kind of exception or particular grant of authority for experimentation that we saw in State Farm or that we see in the next case this morning, or other cases where we have upheld exploratory rules.

[00:20:21] Speaker 06:
You don't have that in the SEC statute, do you?

[00:20:23] Speaker 01:
A couple of points there, Your Honor.

[00:20:25] Speaker 01:
What we do have in the statute is a continuing regulatory responsibility to ensure that the national market system is operating efficiently.

[00:20:34] Speaker 06:
Every regulatory statute has something like that, a goal.

[00:20:37] Speaker 06:
But that doesn't mean, does it, that they have the goal to go out and explore, but not by itself, does it?

[00:20:43] Speaker 01:
Perhaps not in every case, Your Honor, but particularly here where the agency is faced with a credible case on both sides.

[00:20:51] Speaker 01:
both that the status quo is causing market distortions, which the commission found that it believed on page,

[00:21:00] Speaker 01:
I'll get that cited in one minute, but on page 56, what it found was this pilot was necessary to determine if a regulatory response was needed for potential distortions.

[00:21:11] Speaker 06:
If that's your best shot, that there's evidence on both sides and we can't make up our minds, and you didn't have the words exploratory in there, or not the word, but that concept in there, you couldn't base a rule on that, could you?

[00:21:24] Speaker 06:
You were saying we can't make up our minds.

[00:21:28] Speaker 06:
We can't tell whether this will do more harm than good.

[00:21:30] Speaker 06:
We can't tell whether this will further the debt.

[00:21:33] Speaker 06:
We couldn't have told her like that, could we?

[00:21:35] Speaker 01:
I think that the Commission was well within its authority when it determined that answering this question is important in furtherance of the purposes of the Act.

[00:21:48] Speaker 06:
But they also concluded they didn't answer the question yet.

[00:21:50] Speaker 06:
So isn't that rather conclusive?

[00:21:54] Speaker 06:
that they shouldn't be making a rule yet if they can't answer that question yet.

[00:21:57] Speaker 01:
I think, Your Honor, that that puts the Commission in sort of a catch-22 situation of we can't gather information that's needed to determine if there's active market distortion because we don't have the data.

[00:22:08] Speaker 01:
And it's that informational benefit that the Commission specifically set would further the public interest here.

[00:22:14] Speaker 06:
Would you please suppose that you wanted to regulate before you put out the expiration to get the information to decide whether or not to regulate?

[00:22:23] Speaker 01:
I disagree.

[00:22:24] Speaker 06:
There is a different problem in the situation.

[00:22:26] Speaker 06:
I realize you're on the domestic side, and that's foreign policy language, but is there a different problem in the situation?

[00:22:34] Speaker 06:
There isn't a regulatory need just because of the situation.

[00:22:37] Speaker 06:
There has to be a problem that's solvable.

[00:22:39] Speaker 01:
There was a regulatory need here, Your Honor, because of the fundamental questions as to whether the status quo is causing market distortions.

[00:22:47] Speaker 05:
Where's your baseline?

[00:22:48] Speaker 05:
Where's your record?

[00:22:49] Speaker 05:
best record citation to indicate that.

[00:22:52] Speaker 05:
We are starting with a clear problem.

[00:22:55] Speaker 05:
We, the agency, say there is a problem in the market now that needs to be addressed.

[00:23:03] Speaker 05:
The other side says, no, it's not fair.

[00:23:05] Speaker 05:
The other side says two things.

[00:23:06] Speaker 05:
One, there is more information you could have gotten without a rule.

[00:23:11] Speaker 05:
And they say there isn't anything to indicate, at least as I understand them,

[00:23:16] Speaker 05:
any serious problem.

[00:23:17] Speaker 05:
Where is it, because I think what Judge Santel is saying is correct, if you're not starting from a base of, we the agencies say the market is not working, ideally there are problems and it's our job to figure them out.

[00:23:32] Speaker 05:
So now we're going to have a rule to get the information.

[00:23:34] Speaker 05:
Where is that information?

[00:23:36] Speaker 01:
There are two places I would point, Your Honor, to you.

[00:23:38] Speaker 01:
First, at page 56 of the Joint Appendix.

[00:23:40] Speaker 01:
Second, at page 100.

[00:23:42] Speaker 01:
At page 56, the Commission found that this pilot was needed to determine if a regulatory response was necessary to potential distortions of the market from the status quo.

[00:23:53] Speaker 05:
No, no.

[00:23:54] Speaker 05:
Where is it, if anywhere, that the agency says, yeah, there may be issues.

[00:23:59] Speaker 05:
Not that.

[00:24:00] Speaker 05:
But the agency says there are issues.

[00:24:03] Speaker 05:
and we need more information to be able to address the problems that we are looking at in the market.

[00:24:09] Speaker 05:
Where is it?

[00:24:10] Speaker 01:
I think probably the best indication of the Commission's feeling on that is page 100 of the Joint Appendix where the Commission said we believe there may be potential distortions because of maker-taker pricing and we believe it is necessary to engage in a pilot to gather the data

[00:24:28] Speaker 01:
to determine if a regulatory response is needed.

[00:24:30] Speaker 01:
The Commission also at page 66 of the Joint Appendix specifically said, look, we understand that we could try to use theory here and make a prediction, but given the

[00:24:45] Speaker 01:
lack of empirical evidence in the record and the importance of these questions, the commission reasonably found it was appropriate to go take these limited steps and gather the needed data so it could make a data-driven decision on these questions.

[00:25:02] Speaker 03:
I have three related questions for you, Ms.

[00:25:04] Speaker 03:
Harden.

[00:25:05] Speaker 03:
I thought I heard you say in response to a question from Judge Santel that information gathering is not one of the objectives of the agency.

[00:25:15] Speaker 03:
Was I hearing you correctly?

[00:25:17] Speaker 01:
Well, it's not one of the listed objectives of Section 11 Cafe of the statute.

[00:25:23] Speaker 01:
Certainly, engaging in data-driven decision-making is something that is well within the purposes of 3F and the Exchange Act.

[00:25:32] Speaker 01:
That's something this Court itself has indicated the Commission should be striving to do.

[00:25:37] Speaker 06:
Have we ever upheld rulemaking based on the notion that data gathering is a sufficient goal to be accomplished by a rule?

[00:25:47] Speaker 06:
There are certainly cases in which experimental rules have been upheld.

[00:26:07] Speaker 01:
Your Honor, I don't think any of that case law indicates that there needs to be a specific statutory grant of authority for limited rulemaking.

[00:26:15] Speaker 01:
What that case law says is that you can't go outside your otherwise conferred regulatory jurisdiction just because it's experimental.

[00:26:24] Speaker 06:
I don't know if you heard my question.

[00:26:25] Speaker 06:
I was asking you if you have any case where we upheld a pilot for exploratory rulemaking where there was not an express grant for that authority.

[00:26:34] Speaker 01:
I think the FCC case we've cited in our brief, the United Telegraph case, is one such case.

[00:26:41] Speaker 03:
Was this not done by NMS plan because the exchangers aren't buying in?

[00:26:48] Speaker 03:
I mean, the tick pricing rule was not done by a rule.

[00:26:52] Speaker 03:
It was done as an NMS plan.

[00:26:54] Speaker 03:
I'm just curious what difference.

[00:26:56] Speaker 01:
I think the difference is the regulatory scheme through which we ordinarily regulate transaction fees is done, you know, the existing fee cap, for example, regulation 610C was done by rulemaking under NMS.

[00:27:11] Speaker 01:
And one of the things the commission is exploring here is whether that cap continues to be appropriate or whether it's allowing fees

[00:27:18] Speaker 01:
to be held sort of artificially high subsidized rebates.

[00:27:22] Speaker 03:
And some of the questions I was asking of Mr. Hungar may or may not have a basis in the record as you see it.

[00:27:30] Speaker 03:
Is market confidence one of the rationales that you're relying on here to answer this question one way or another or not?

[00:27:37] Speaker 01:
The commission didn't actually expressly

[00:27:41] Speaker 01:
invoke market confidence, but what the commission said is the information gathered here will benefit investors and the public interest.

[00:27:49] Speaker 01:
That's at page 36 of the appendix.

[00:27:51] Speaker 01:
The commission also found that the information gathered through the no rebate test group at page 38 justified proceeding on that basis.

[00:28:01] Speaker 01:
Again, this is all against the backdrop of the commission's continuing responsibility to ensure among changing market conditions

[00:28:10] Speaker 01:
that the regulatory scheme continues to further Congress's objectives for the national market system.

[00:28:15] Speaker 04:
One of those objectives.

[00:28:17] Speaker 04:
What about the data that the other side says you could have collected without adopting this rule and having done it?

[00:28:22] Speaker 01:
The Commission specifically went through existing data sources on this question, and ultimately none of the data that the Commission looked at or that the petitioners are referring to this morning would get you to the question of causality.

[00:28:37] Speaker 03:
Will this test get you there?

[00:28:40] Speaker 01:
Yes, Your Honor.

[00:28:41] Speaker 01:
What the Commission found is that this test is reasonably designed to get us there because

[00:28:46] Speaker 01:
The real causation issue here is that fees and rebates in order of routing can be jointly determined.

[00:28:52] Speaker 01:
And so if you don't hold one constant, you're not really going to know what the causal factor is.

[00:28:58] Speaker 01:
And that's what the pilot does.

[00:29:00] Speaker 03:
But does the pilot hold a constant?

[00:29:01] Speaker 03:
I mean, one of the things, I think it's in the market maker's brief, they talk about the inability to distinguish client versus proprietary orders.

[00:29:11] Speaker 03:
and that you will also be unable to distinguish that with the data that you're collecting.

[00:29:16] Speaker 03:
Is that a problem or not?

[00:29:17] Speaker 01:
We disagree with that, Your Honor, and I think there's really two points to be made there.

[00:29:23] Speaker 01:
First of all, the principal agency distinction for orders only gets to the question of potential conflicts of interest for broker-dealers, so it doesn't speak to any of the other market structure questions the Commission's looking at.

[00:29:36] Speaker 01:
And also, with respect to that, what the Commission made the determination was

[00:29:40] Speaker 01:
that marking them principal or agency will get us enough of a distinction to get some meaningful research.

[00:29:47] Speaker 01:
But the reason the commission didn't go further is it was trying to tailor this pilot to limit its impact.

[00:29:53] Speaker 01:
And what it didn't want was to start requiring collection of additional data and recording of data that exchanges aren't already doing now.

[00:30:01] Speaker 01:
And so we decided this would be an appropriate proxy for that question.

[00:30:07] Speaker 03:
markets out there that don't use Maker Taker, why are those not already the source of the data that you need?

[00:30:15] Speaker 03:
Compare a Maker Taker market or Maker Taker exchange with one that doesn't use the rule.

[00:30:20] Speaker 01:
For precisely the question we were getting at earlier, Judge Pillar, which is that you're not going to be able to determine

[00:30:27] Speaker 01:
causation, again, without holding one constant, and as long as you have rebates being paid at other exchanges, it's not gonna tell you what happens if no exchange does it, right?

[00:30:39] Speaker 01:
It's not gonna tell you the effect on spreads, for example, across different classes of securities, if rebate-sensitive orders can just go next door to the other NYSE-sponsored exchange, which does pay rebates.

[00:30:53] Speaker 01:
It's not going to tell you the effect

[00:30:56] Speaker 01:
of lower take fees market-wide on order routing.

[00:31:01] Speaker 01:
So many of these execution quality questions are not going to be answered so long as you have most exchanges paying rebates either maker-taker or taker-maker.

[00:31:15] Speaker 01:
And so that is, again, a piece of why the commission decided

[00:31:19] Speaker 01:
and reasonably determined that in this situation, it was necessary to take these limited steps to gather data so that it could make an informed decision on the effectiveness.

[00:31:30] Speaker 05:
Your research didn't produce anything really much on point, I gather.

[00:31:36] Speaker 05:
I mean, I'm really kind of surprised when I started looking at this pilot program type question of the APA.

[00:31:43] Speaker 05:
We've had thousands of APA cases over the years.

[00:31:46] Speaker 05:
And you really couldn't come up with much which endorses the idea that an agency perplexed about some things in the area in which they're regulating can say, well, let's try this.

[00:32:02] Speaker 05:
And the courts have said, sure, go ahead.

[00:32:06] Speaker 05:
It's your area to regulate.

[00:32:07] Speaker 05:
Go ahead and try it.

[00:32:08] Speaker 05:
See what you come up with.

[00:32:09] Speaker 05:
Make it time limited so it seems fair.

[00:32:12] Speaker 05:
But the cases aren't there.

[00:32:14] Speaker 05:
The obvious reason because there are adverse consequences that flow from that approach and if you're saying nothing more than there may be some stuff there, let's look at it.

[00:32:23] Speaker 05:
If you had a really strong position

[00:32:26] Speaker 05:
where the agency here is saying, there is a real problem.

[00:32:30] Speaker 05:
We know there's a real problem.

[00:32:31] Speaker 05:
We have to get out of it.

[00:32:33] Speaker 05:
And there's not much disagreement over that.

[00:32:35] Speaker 05:
Market confidence is affected.

[00:32:37] Speaker 05:
The market is not working the way it ought to work.

[00:32:40] Speaker 05:
We need the information.

[00:32:41] Speaker 05:
But you're not even saying that.

[00:32:42] Speaker 05:
You're just saying, well, you know, we could probably do it better if we had more information.

[00:32:47] Speaker 05:
So now we're going to wreak havoc by putting a regulation in effect which will cost folks some money.

[00:32:55] Speaker 01:
I think it ignores sort of the larger context of this rule.

[00:33:00] Speaker 01:
Well, that's my first question.

[00:33:01] Speaker 05:
You found no cases, right?

[00:33:02] Speaker 01:
I think the FCC United Telegraph case is probably the best one that we found, Your Honor.

[00:33:08] Speaker 01:
Yes.

[00:33:09] Speaker 05:
That's a whole lot of cases out there, and that's all you could come up with.

[00:33:12] Speaker 01:
I mean, there's also a number of FERC and Federal Power Commission cases, which there's nothing to indicate in the reasoning of those cases that they are limited to the idea of rate making.

[00:33:25] Speaker 01:
But that being said, this isn't an unusual question for the court in the sense that this is

[00:33:32] Speaker 01:
clearly governed by state farm standards.

[00:33:35] Speaker 01:
Is this a reasonable or rational exercise of the Commission's core authority?

[00:33:40] Speaker 06:
Not only was there press authority for the agency to use the declaration, they were directed to, weren't they?

[00:33:46] Speaker 06:
That's one that is a very specific direction.

[00:33:48] Speaker 06:
You will issue a rulemaking within that period.

[00:33:52] Speaker 06:
That may mean in so many, but you will issue a rulemaking.

[00:33:55] Speaker 06:
I noticed the proposed rulemaking.

[00:33:57] Speaker 06:
It will do certain things.

[00:33:58] Speaker 06:
And they were, the agency was definitely empowered to do

[00:34:02] Speaker 06:
experiments in that statute, wouldn't it?

[00:34:06] Speaker 01:
But again, I don't think there's anything in the case law that turns upon the idea of a specific statutory provision for experimentation.

[00:34:15] Speaker 06:
The question is... An agency has only the authorities that are given the statute.

[00:34:20] Speaker 06:
It's not a constitutional creature.

[00:34:23] Speaker 06:
It doesn't have inherent authority.

[00:34:25] Speaker 06:
So the fact that there aren't any cases saying that the statutes allowed it

[00:34:31] Speaker 06:
is evidence against you, isn't it?

[00:34:34] Speaker 01:
Not here, Your Honor, where we have explicit statutory authority to regulate transaction fees and to carry out the objectives of the NMS.

[00:34:42] Speaker 01:
And the question is, is the decision to do so in a limited manner to gather information a rational exercise of that authority?

[00:34:52] Speaker 06:
Well, no, the question is whether that decision still requires the same foundation as rulemaking would in other countries.

[00:34:58] Speaker 01:
And we are not contesting that the provisions of the Exchange Act apply just as they do in other rulemakings.

[00:35:07] Speaker 06:
Provision of the APA is what I'm asking about.

[00:35:08] Speaker 01:
The APA and the Exchange Act.

[00:35:10] Speaker 06:
You seem to be trying to get out of the APA to have a get out of APA free card by calling it time limited or by calling a pilot.

[00:35:19] Speaker 06:
Nonetheless, if the rule that affects primary conduct is a regulated entity,

[00:35:23] Speaker 01:
I don't think that's our position, Your Honor.

[00:35:26] Speaker 01:
We certainly accept that the APA requirements apply here.

[00:35:29] Speaker 01:
We simply disagree as to whether we've met them.

[00:35:32] Speaker 01:
And we believe in this context where this is not, as Judge Edwards referred to, sort of the mere idle curiosity.

[00:35:41] Speaker 01:
This is the result of a long-standing and well-thought-out deliberative process.

[00:35:49] Speaker 01:
Market participants and academics proposing and debating alterations to this regulatory structure for years.

[00:35:55] Speaker 01:
We've had members of Congress and two commission advisory committees recommend doing a pilot on the basis that there's not another way to answer these very important questions of market structure.

[00:36:07] Speaker 01:
and where both the status quo and the suggested alternatives are credibly claimed to cause actual market harm, it's certainly a rational exercise of the Commission's authority to take limited steps and gather data.

[00:36:22] Speaker 01:
And the extent that we think it's relevant that this is limited is that we think that's relevant to the State Farm Inquiry.

[00:36:31] Speaker 05:
I'll have to go back and look at page 100.

[00:36:34] Speaker 05:
That's the only page you're citing.

[00:36:35] Speaker 05:
You're saying the Commission says there really is an existing problem.

[00:36:38] Speaker 05:
It's a very serious one, and it's undisputed.

[00:36:40] Speaker 05:
That's your claim?

[00:36:41] Speaker 01:
Now, Your Honor, to be clear, what the Commission said is we believe there may be, given the evidence before us, active distortion going on in the market, and we need to determine whether that is the case.

[00:36:54] Speaker 01:
And that is the impetus for this rule.

[00:36:56] Speaker 03:
So you're referring to the commission believes the current fee and rebate system may have resulted in a number of market failures, including rebates incentivizing brokers to route orders to trading venues that pay the highest rebates.

[00:37:09] Speaker 03:
Is that the part you're referring to?

[00:37:10] Speaker 01:
That is, Your Honor.

[00:37:11] Speaker 03:
However, the commission currently lacks the data to estimate the extent of any existing market failures.

[00:37:21] Speaker 03:
so the information that learns from the pilot could be used in future rulemaking.

[00:37:25] Speaker 01:
Yes, and the commission said something similar to that, although not those exact words, at page 56 of the appendix in discussing the authority to engage in the pilot.

[00:37:39] Speaker 05:
I see my... Does page 100, I'm not looking at that language, does page 100 say there are market failures because of this, or we think there might be?

[00:37:47] Speaker 01:
We think there might be.

[00:37:49] Speaker 01:
But again, the reason we couldn't say there are is because we don't have any data, empirical data on the causality here.

[00:37:57] Speaker 01:
And what the commission said it's trying to do is to make a data-driven decision when it's addressing these very important questions of market structure.

[00:38:06] Speaker 01:
And that is consistent with both the statutory authority and this court's case law.

[00:38:12] Speaker 03:
And can you address some, I mean there are several steps to the challenge and one of them is even if you were authorized and had checked the boxes that you need to do this pilot that the way it's designed you aren't going to get the data that you want.

[00:38:32] Speaker 03:
And I don't know if you want to respond to any of those.

[00:38:35] Speaker 01:
I do, Your Honor.

[00:38:36] Speaker 01:
Yes, I mean, I think the biggest claim in that regard is about the inclusion of off-exchange venues.

[00:38:45] Speaker 01:
Exclusion.

[00:38:46] Speaker 01:
Exclusion, yes, I'm sorry.

[00:38:48] Speaker 01:
And what the Commission said about that is existing data is going to allow it to track

[00:38:55] Speaker 01:
order flow on and off exchange, which is sort of the important question for purposes of this pilot with respect to off-exchange venues.

[00:39:03] Speaker 01:
And the reason that's really the important question is otherwise off-exchange venues are not at all part of the regulatory scheme that's being tested here, nor do they charge transaction-based fees, for example,

[00:39:16] Speaker 01:
They typically don't pay rebates and so none of the other questions the Commission is asking in terms of what's the appropriate regulatory structure for exchange transaction based fees really apply off exchange.

[00:39:30] Speaker 01:
The only sort of the most pertinent question with respect to those is does the regulatory scheme on exchange shift order flow back or forth off exchange and we can track

[00:39:41] Speaker 01:
with existing data, and so the Commission found both that it wasn't necessary to include off-exchange venues for that reason, but also that to do so would involve a greatly increased scope and complexity and cost to this pilot.

[00:39:58] Speaker 01:
If you think about it, the Commission essentially would have had to

[00:40:01] Speaker 01:
create a regulatory scheme to overlay over off-exchange venues whose fees are not regulated right now at all in order to include them for a short pilot and given that we didn't need the more granular data for them, it was a reasonable conclusion despite the potential for competitive burdens to go forward on that basis.

[00:40:24] Speaker 01:
Thank you.

[00:40:25] Speaker 01:
Thank you.

[00:40:28] Speaker 03:
There's no time remaining.

[00:40:30] Speaker 03:
Mr. Hunger will give you two minutes.

[00:40:36] Speaker 00:
With respect to the question whether the commission found a problem, it clearly did not.

[00:40:40] Speaker 00:
The pages cited by counsel do not say the commission believes there is a problem.

[00:40:44] Speaker 00:
It says there may be, there may not be.

[00:40:46] Speaker 00:
We don't know.

[00:40:47] Speaker 00:
That's not the finding of a problem.

[00:40:48] Speaker 00:
And the information that the commission refused to obtain would clearly and unquestionably have shed light on that question.

[00:40:55] Speaker 00:
The biggest element of the question, is there a problem, is are broker-dealers behaving in ways that reflect conflict of interest that are contrary to the interests of their investors?

[00:41:05] Speaker 00:
Clearly, if you ask for the routing tables, you could answer that question.

[00:41:09] Speaker 00:
The SEC doesn't deny that the routing tables would not shed light on the question whether broker-dealers are behaving in the way that they should.

[00:41:15] Speaker 00:
They refuse to answer the question.

[00:41:16] Speaker 00:
In fact, they conceded on page 71 with respect to ATSs, which are also regulated as broker-dealers, that, well, yes, we're going to be getting information from them, but it won't contain routing tables, so it won't contain detailed information on how fees and rebates affect the order routing decisions.

[00:41:33] Speaker 00:
These limitations make it difficult to use the data to make causal inferences.

[00:41:37] Speaker 00:
Of course, those limitations are the result of the Commission's own refusal to demand the information that it has every right to obtain to help answer the question, is there a problem that would then maybe justify going down the road of imposing these harms on investors.

[00:41:51] Speaker 00:
The Council cited the United Telegraph workers' case.

[00:41:54] Speaker 00:
as authority for the proposition that an agency can use experimentation as a justification for not advancing the purposes of the statute.

[00:42:02] Speaker 00:
It's charged with implementing the case as nothing of the kind.

[00:42:05] Speaker 00:
To the contrary, this court said that the commission, the FCC in that case, has a mandate

[00:42:11] Speaker 00:
under the statute to inform itself of technical advancements and improvements in modes of communication so that the benefits of new inventions and developments may be made available to the people.

[00:42:20] Speaker 00:
And this experiment was designed.

[00:42:23] Speaker 00:
This is United Telegraph Workers against FCC.

[00:42:26] Speaker 00:
And the court said this experiment that was being challenged was designed to make such innovation possible.

[00:42:32] Speaker 00:
So the commission said and was furthering the purposes of the statute.

[00:42:36] Speaker 00:
This commission is not doing that.

[00:42:38] Speaker 00:
Thank you.

[00:42:39] Speaker 03:
Thank you.

[00:42:39] Speaker 03:
Case is submitted.

[00:42:42] Speaker 02:
Stand please.

[00:42:44] Speaker 02:
This is all for portable melting and brief recess.