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Fixed Income and Options: The Other Market Structures
Remarks at the Fixed Income Forum Spring Roundtable

Washington D.C.

March 30, 2023

Thank you Thanos [Papasavvas], for that kind introduction, and thanks to all of you for inviting me here today.

Before I begin, I must give the customary disclaimer that the views I express today are my own and do not necessarily reflect the views of my fellow commissioners or the staff.

At the end of last year, my fellow Commissioners and I voted to propose a broad package of reforms aimed primarily at improving competition, transparency, and integrity in the equity markets.[1] Those proposals have generated their fair share of attention and discussion, and rightfully so, as the equity markets play a key role in allowing Americans to invest and grow their savings. I am pleased that the SEC has undertaken these efforts to try to improve outcomes for investors, and retail investors in particular, and I am reviewing the comments with interest.

However, investors also turn to other securities markets to grow their savings and plan for their futures: the fixed income markets, and increasingly, the options markets as well. The fixed income markets are the place where many Americans turn to seek reliable, safe investments as they approach retirement. And the options markets have exploded in popularity over the last several years.[2] The options markets, while historically dominated by institutional players, are increasingly attracting retail investor participation, as individuals seek to maximize their returns by engaging in more hands-on investing, often through online platforms and apps.[3]

Equity market structure tends to get a lot of attention, and this is especially true in the post-GameStop era. However, by some measures, investor protection and outcomes in the fixed income and options markets lag behind. We at the SEC have devoted a lot of time and effort over the past several years to reforms focused on the traditional equity markets. Today, I want to make a case for some structural reforms in the fixed income and options markets.

Fixed Income Markets

Since this is the Fixed Income Forum, I will turn first to the fixed income markets, which comprise around half of the capital markets the SEC oversees.[4] Of course, it is difficult to overstate the importance of the $24 trillion Treasury market, but the $10 trillion corporate bond market, $12 trillion mortgage-backed securities market, and $4 trillion municipal bond markets all play important roles in the U.S. economy.[5]

I acknowledge that there have been impactful reforms proposed, and in some cases implemented, over the last several years. For example, expansions and improvements to FINRA’s TRACE reporting service have improved transparency significantly. Starting in 2017, broker-dealers were required to report post-trade transaction data in Treasuries,[6] and in 2022, the Federal Reserve began requiring many non-FINRA member banks to report information on their transactions as well.[7] FINRA has adopted changes to improve the timeliness and accuracy of TRACE reporting, by reducing the reporting timeframes for Treasuries from end-of-day to 60 minutes and requiring more granular timestamps.[8] Starting in May, FINRA will require a portfolio trade indicator for corporate securities, which should improve the usefulness of TRACE by making it clear when a particular price was agreed to as part of a portfolio, and may therefore not be reflective of the independent market.[9] FINRA also has proposed shortening the fifteen minute reporting timeframe for non-treasury TRACE-eligible securities to one minute.[10] And there are additional improvements under discussion with respect to sovereign debt reporting, public dissemination of post-trade information on Treasury securities, and more.[11]

At the SEC, we have put forward proposals that would, among other improvements, increase SEC oversight of key market participants and platforms in the fixed income markets.[12] Last year, we also proposed rules to expand the number of transactions in Treasury securities that are subject to central clearing.[13] And while I referred to our December package of proposals as focused on the traditional equity markets, there are aspects of it, such as the proposed Regulation Best Execution, that apply to trading in fixed income securities, as well.[14]

I want to thank those of you gathered here today for your role in helping to initiate and implement those reforms, and for your input with respect to the initiatives still at the proposal stage. There has been a lot of reflection from within the industry about how to make the fixed income markets more resilient, and that has been vital. You are the experts, on the front lines of this market, and your input is always thoroughly considered, valued, and appreciated.

With all the initiatives I just listed, is there anything more that needs to be done to improve fixed income market structure? My answer would be a resounding yes. While I value the improvements initiated over the last few years, the fixed income markets are still considerably less transparent and can be much more costly for investors than, for example, national market system (NMS) stocks.[15] And with respect to some of the changes we have made or proposed, I fear the story can be a tale of two markets, with increased transparency and oversight in the Treasury and agency securities markets,[16] but without corresponding changes to the corporate bond and municipal securities markets. The corporate bond and municipal securities markets are relied upon by both retail and institutional investors, including Americans who are approaching retirement or are already there. In the corporate bond market, trades under $100,000 account for between 60% and 70% of reported customer transactions.[17] In the municipal securities market, transactions of less than $25,000 account for more than half of the trades, and those less than $100,000 account for 87% of trades, reflecting that individual investors hold the majority of outstanding municipal bonds.[18]

Investors in these markets are incurring trading costs that far outstrip the costs of transacting in the equity markets. While estimates of trading costs can be a challenge in part due to the relative lack of transparency, academics have estimated corporate bond trading costs at around 84 basis points[19] and municipal bond trading costs as high as 90 basis points for retail-size trades.[20] Surprisingly, smaller bond transactions, which are more likely to originate from retail investors, are more expensive to complete than larger transactions - the opposite of the pattern typically observed in equity markets.[21]

One way to reduce transaction costs and improve investor outcomes would be to improve price transparency. Post-trade price transparency, via TRACE and EMMA, has been a feature of the U.S. fixed income markets, to varying degrees, since the 1990s, and there have been significant improvements over the last several years. However, fixed income markets still largely lack the pre-trade price transparency that has been a feature of the equity markets for decades. While there are some quotation data available from dealers and electronic venues, smaller dealers are less likely to have access to these data or the ability to consolidate them effectively, and they are generally not visible to the retail customer and therefore cannot be used to help the customer negotiate a better price with its dealer.[22] And post-trade information for infrequently traded bonds can be stale or even unavailable.[23] Consistent with this, research on municipal bond markets from the SEC’s Division of Economic and Risk Analysis showed that the majority of customer trades execute at worse prices than best available dealer quotes.[24]

When I discuss pre-trade transparency, I sometimes use the example of airline travel. When I am searching for a flight, I do not go to an airline website and book the flight for whatever price is offered. I start with one of the aggregation websites, which gathers all the available prices online and allows me to select the best offer. Like most people, I want to be able to see the best price available before making my purchase.

The lack of meaningful and consistent pre-trade price transparency hinders competition, increases costs, and makes it difficult for investors to assess their execution quality. This is all the more important where investors may not have the level of disclosure about the issuer that an investor would receive in the public equity markets – for example, the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC) found that investors in municipal bonds often receive information that’s over 500 days old[25] – and may be relying on bond ratings that are imperfect at best.[26] Having made some excellent progress on post-trade transparency, I hope that industry members, FINRA, the MSRB, and my colleagues at the SEC can continue to work together to advance the goal of improving pre-trade price transparency, as well.

Another way to improve investor outcomes in fixed income markets is through improved visibility into market intermediaries and trading platforms. As I alluded to earlier, the SEC has put out several proposals that would enhance oversight of these entities with respect to the Treasury and agency securities markets. These are important initiatives that have the potential to increase the resiliency of those markets, as well as providing improved investor protections. However, market intermediaries and platforms trading corporate and municipal bonds have been largely left out of these initiatives. For example, while the SEC has proposed extending the requirements of Regulation SCI to certain platforms that trade Treasuries and government securities, to date, we have not proposed applying that rule to any trading platforms that exclusively trade corporate debt or municipal securities.[27] Similarly, the most recent proposal would apply Regulation SCI to certain large broker-dealers, in particular, those that exceed a total assets threshold or a transaction activity threshold in NMS stocks, exchange-listed options contracts, Treasury securities, or agency securities. However, broker-dealer or ATS activity in corporate bond and municipal securities markets at any level would not trigger the application of Regulation SCI.[28]

Additionally, the SEC imposes operational transparency requirements on Alternative Trading Systems (ATSs) that trade NMS securities, including disclosures regarding how trading interests are handled, fee structures, the ATS’s interaction with related markets, liquidity providers, activities the ATS undertakes to surveil and monitor its market, and any potential conflicts of interest that might arise from the activities of the broker-dealer operator or its affiliates.[29] The SEC has proposed to extend these requirements to ATSs that trade Treasuries and agency securities,[30] but has not made the same proposal with respect to platforms that trade corporate and municipal bonds. The theme is the same – SEC requirements intended to protect investors are leaving behind investors in the corporate bond and municipal securities markets.

The rationale for this differing treatment has been that corporate and municipal bond markets are less electronic and rely more on manual trading than Treasury and agency securities markets.[31] While voice trading is still more prevalent in those markets, the technology for trading corporate debt and municipal securities has evolved at a rapid pace, and there is ample data indicating that those distinctions may no longer hold up.[32] I urge my colleagues at the SEC to consider providing investors in corporate and municipal bond markets – who, again, are often individuals seeking safety and reliability – with some of the same protections that we provide to investors in other asset classes.

One last, and perhaps the simplest, way to improve investor outcomes in the fixed income markets that I would like to suggest is the expansion of markup and markdown disclosures. Markups and markdowns refer to the difference between the price for the bond charged to the customer, and the price the dealer paid for that bond. Since 2018, these disclosures have been required as part of the trade confirmation for retail customers when a customer trade offsets a same-day principal trade in whole or in part.[33] These disclosures have been welcomed by investors, and many broker-dealers are now providing markup and markdown information that goes beyond the requirements of the FINRA and MSRB rules. A requirement to provide markup and markdown information for all trades, and to provide that information in advance of the transaction, rather than just on the confirmation, is a modest change that could provide even greater benefits to investors.

While I have offered some ideas today regarding possible reforms, I know that these are challenging issues requiring collaboration between investors, industry members, regulators, and academics. To that end, the SEC could consider convening roundtables or reconstituting the FIMSAC, with a diverse membership reflecting academic, investor, and industry perspectives, to grapple with some of these issues. Again, there has been considerable progress over the last few years in many aspects of fixed income market structure, and I appreciate the role industry has played in those initiatives. But, I still think we can do better for our fixed income investors.

Options Markets

Although this is the Fixed Income Forum, I hope you will also indulge me today as I spend some time discussing another asset class. Next month marks the 50th anniversary of trading in listed options, which began at CBOE in 1973.[34] On the first day, a handful of call options (no puts) were traded on sixteen stocks, on one exchange.[35] Today, there are sixteen options exchanges, with another proposed to come online this summer, and a dizzying array of listed options available to investors. While options serve an important hedging function in many institutional portfolios, the last several years have also seen an increase in retail participation.[36] The initial surge coincided with the COVID-19 pandemic and the general rise in retail trading of all types, but interest in the options market has not cooled. Total options volume was $3.4 billion in 2022, an all-time high and the third consecutive record-breaking year,[37] and volumes have continued to increase in 2023.[38]

However, while the technology and size of those markets would likely be unrecognizable to 1970s options traders, in many ways, the options markets still have a long way to go. As compared to traditional equity markets, options markets are generally less liquid, can have wider spreads and higher fees, and feature pervasive conflicts of interest. For investors, this can translate to high costs and poor outcomes. Additionally, options strategies can be incredibly risky and expose an investor to sudden and severe losses, while the associated disclosures can be difficult for even the most sophisticated investors to parse.

The SEC’s proposed Order Competition Rule is intended to increase order-by-order competition for retail orders in the equity markets.[39] However, the features of retail trading on the equity markets that have led to concerns about the lack of competition – specifically, the dominance of a handful of large market-makers internalizing orders, and conflicts of interest between market intermediaries and their customers – are even more pronounced in the options markets.[40] Not surprisingly, options markets account for by far the largest share of payment for order flow, making up about 65% of payments.[41] The Order Competition Rule would establish auctions to expose certain orders of individual investors to competition before such orders could be executed internally off-exchange.[42] The options market already includes so-called price improvement auctions; however, they operate without some of the features and protections of the proposed auctions for equity securities.

For example, options auctions provide a number of advantages to the participants – exclusively brokers – that bring the order to the auction.[43] If a broker brings an order to an auction they are often guaranteed at least 40% or 50% of the order. They can also auto-match the best prices submitted by other auction participants, allowing them to participate without competing on price.[44] Brokers also have informational advantages, due to the lack of dissemination of auction information. The initiator of the auction knows more information about the order – for example, whether it is an informed order, or not – and can benefit from that information, routing to the auction when beneficial, and executing against their own quotes otherwise. Initiating brokers also benefit from lower fees.[45] All this adds up to auctions that are less competitive than they may appear to be, and certainly not as competitive as they should be.

One potential way to improve investor outcomes in the options market would be to apply some of the features of the proposed Order Competition Rule to these existing price improvement auctions. For example, the removal of the guaranteed participation rights and auto-match provisions I just described could incentivize participants in auctions to bid more aggressively.[46] In addition, limiting asymmetric fees for brokers initiating auctions, and constraining the ability of brokers to direct the routing of options to their affiliated market-makers, could limit conflicts of interest. Better dissemination of information about the auctions could encourage participation by entities other than the conflicted brokers.[47]

Another important aspect of the recent package of equity market structure proposals is reforms to Rule 605, which requires market centers, such as exchanges, ATSs, and broker-dealer internalizers, to make monthly disclosures of standardized information concerning execution quality for orders in NMS stocks.[48] This can help investors and intermediaries understand what happens to their orders after they are submitted for execution, and how price and other execution quality measures compare across venues. Rule 605, and the recently-proposed enhancements, have been generally well-received by market participants. And yet, there is no similar requirement in the options market for entities to publish information about execution quality. Requiring options exchanges to disclose execution quality statistics in a consistent, comparable fashion could help investors assess their own execution quality and act on that information.

A third aspect of the equity market structure proposal involves access fee caps. The SEC imposes caps on the access fees that exchanges are permitted to charge for NMS equities, in order to prevent fees from constituting an excessive percentage of the share price and thereby undermining price transparency. As part of the December package, the SEC has proposed lowering the cap from 30 mils ($0.003), to no more than 10 mils ($0.001).[49] However, no such caps exist for options exchanges, and fees can run higher than an equivalent of 100 mils ($0.01) for some orders.[50] In 2010, the SEC proposed to cap transaction fees on options exchanges, explaining that it was “concerned that because of the requirements for intermarket price protection, competitive forces, by themselves, are not, and will not be, enough to prevent fees from being charged that interfere with fair and efficient access to an option exchange’s displayed prices.”[51] The proposal would also have prohibited unfairly discriminatory terms that prevent or inhibit efficient access to quotations.[52] However, the proposed amendments were never adopted. In my view, the SEC should revisit the idea of caps on access fees and a prohibition on fee discrimination, which could provide investors in the options market with similar protections to those that investors enjoy in the equity markets.

Finally, I’d like to return to the rise of retail trading in the options markets over the last several years. As I noted earlier, many retail investors, of varying levels of experience, began trading options during the COVID-19 pandemic. Options strategies can be complex and risky, and retail investors often lose money.[53] Given the risks associated with options trading, there are heightened obligations for brokers when approving options trading for retail customers. However, brokers do not always fulfill those obligations,[54] and when they do, it may look more like a click-through module than a face-to-face discussion of the features and risks. Indeed, with the rise of trading apps and other online platforms, investors can easily trade options without direct contact with their brokers.

This likely was not anticipated when the options approval rules – which require brokers to exercise due diligence when approving customers for option trading – were originally issued. At that time, the norm was that retail investors had direct contact with their brokers, who could explain the impact of particular strategies and the risks particular positions entailed. Checking a box indicating that one has reviewed the Options Disclosure Document – a dense, almost 100-page document – is not sufficient in today’s world.

The recent frustration and confusion surrounding the exercise of put options on Silicon Valley Bank and Signature Bank stocks when trading was halted demonstrated that investors of all levels of sophistication can be caught off-guard by the operation of these instruments.[55] I would like to see the SEC and FINRA revisit and strengthen the options qualifications framework, and make improvements to investor education, in light of the transformative changes of the last several decades.[56]

Options are growing in popularity, with high volumes on both the institutional and retail sides. Options can serve an important risk management purpose, but they also come with high costs and serious risks. I hope that my colleagues at the SEC, my fellow regulators, investors, academics and industry can work together, perhaps in the context of an Options Market Structure Advisory Committee, to consider some of these changes, and to work toward making the options market a more efficient and transparent place for investors of all types.


Equity market structure is critically important, but the equity markets aren’t the only securities markets investors rely on. The fixed income and options markets are important as well, and have historically received less attention from academics, regulators, and the public.[57] Today I’ve presented some ideas for reforms in those markets that I believe could have a significant impact on investor protection and investor outcomes. Thank you for your attention, and I look forward to your questions.

[1] See Disclosure of Order Execution Information, Release No. 34-96493 (Dec. 14, 2022); Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders, Release No. 34-96494 (Dec. 14, 2022); Order Competition Rule, Release No. 34-96495 (Dec. 14, 2022); Regulation Best Execution, Release No. 34-96496 (Dec. 14, 2022).

[2] See Options Clearing Corporation, Historical Volume Statistics (showing that average daily volume in options has more than doubled since 2019).

[3] See, e.g., Gunjan Banerji and Alexander Osipovich, “Free Trades, Jackpot Dreams Lure Small Investors to Options,” Wall Street Journal (June 24, 2020).

[5] SIFMA, Fixed Income Outstanding (accessed March 29, 2023).

[6] See FINRA, Regulatory Notice 16-39 (October 2016) (SEC Approves Rule Change to Require Reporting of Transactions in U.S. Treasury Securities to the Trade Reporting and Compliance Engine (TRACE)).

[7] Board of Governors of the Federal Reserve System, Agency Information Collection Activities: Announcement of Board Approval Under Delegated Authority and Submission to OMB, 86 FR 59716 (October 28, 2021).

[9] FINRA, Regulatory Notice 22-12 (May 2022) (FINRA Adopts Amendments to TRACE Reporting Rule to Require Identification of Portfolio Trades).

[10] FINRA, Regulatory Notice 22-17 (August 2022) (FINRA Requests Comment on a Proposal to Shorten the Trade Reporting Timeframe for Transactions in Certain TRACE-Eligible Securities From 15 Minutes to One Minute).

[11] FINRA, Regulatory Notice 22-28 (December 2022) (FINRA Adopts Amendments to Require Reporting of Transactions in U.S. Dollar-Denominated Foreign Sovereign Debt Securities to TRACE).

[14] Regulation Best Execution, Release No. 34-96496 (Dec. 14, 2022).

[15] See, e.g., Hendrik Bessembinder, Chester Spatt, and Kumar Venkataraman, A Survey of the Microstructure of Fixed-Income Markets (February 6, 2019) (hereinafter “Bessembinder”).

[16] “Agency securities” refers to debt and mortgage-backed securities issued by U.S. government agencies.

[17] Bessembinder at 15. TRACE and EMMA lack information on customer types, so determining the precise proportions of retail and institutional traders is not possible. $100,000 is an often-used proxy for retail size trades.

[18] Id. at 17.

[19] Id. at 22.

[20] Id. at 23.

[21] Id. at 25.

[22] Id. at 31-32.

[23] Louis Craig, Abby Kim, and Seung Won Woo, Pre-trade Information in the Corporate Bond Market (October 2020).

[24] Louis Craig, Abby Kim, and Seung Won Woo, Pre-trade Information in the Municipal Bond Market (July 2018). In contrast, dealer orders typically trade close to the best prices.

[26] See, e.g., Francesco Sangiorgo, Chester S. Spatt, The Economics of Credit Rating Agencies (October 2017) (describing conflicts of interest, lack of transparency into methodology, and other concerns related to credit rating agencies).

[27] Regulation Systems Compliance and Integrity, Release No. 34-97143 (Mar. 15, 2023).

[28] Under the proposal, an entity’s corporate or municipal securities activity alone would not qualify it as an SCI entity, although if a broker-dealer or ATS qualifies on another basis (i.e., activity or market share in other asset classes) its systems for trading corporate and municipal bonds would also be covered. Id.

[29] 17 CFR § 242.304.

[31] SeeRegulation Systems Compliance and Integrity, Release No. 34-73639 (Nov. 19, 2014) at 70-71.

[32] See,e.g.,SIFMA Insights: US Fixed Income Market Structure Primer(July 2018) (discussing several different types of fixed-income markets, noting that the historically quote-driven voice broker market structure has moved to accommodate limit order book protocols in the intradealer markets and request-for-quote (“RFQ”) protocols in the dealer-to-client markets; and assessing that “Current growth [in the dealer-to-client markets] is enabling the total growth in overall electronification percentages: UST 70%, Agency 50%, Repos 50%, IG Corporates 40% and HY Corporates 25%”);seealsoAnnabel Smith,Pandemic sees electronic fixed income trading skyrocket in 2021, The Trade (Mar. 3, 2021); Municipal Securities Rulemaking Board,Characteristics of Municipal Securities Trading on Alternative Trading Systems and Broker’s Broker Platforms(Aug. 2021) (discussing volume on ATSs and broker’s broker platforms from 2016-2021).

[33] SeeOrder Approving SR-FINRA-2016-32, Release No. 34- 79346 (November 17, 2016); Order Approving SR-MSRB-2016-12, Release No. 34-79347 (November 17, 2016).

[34] Option Strategist, Celebrating 50 Years of Listed Option Trading at the CBOE (accessed March 29, 2023).

[36] See, e.g., Gunjan Banerji and Alexander Osipovich, “Free Trades, Jackpot Dreams Lure Small Investors to Options,” Wall Street Journal (June 24, 2020).

[38] See, e.g., Eric Wallerstein, “Options Trading Breaks Daily Record” Wall St. Journal (February 2, 2023).

[39] Order Competition Rule, Release No. 34-96495 (Dec. 14, 2022).

[40] Internalization in the options markets takes a different form than in the equity markets, because all orders in options must trade on an exchange. Thus, there is no off-exchange internalization, but internalization still takes place because brokers are able to or steer their order flow to an exchange where they can act through an affiliated market maker who can obtain a guaranteed allocation. Thomas Ernst, Chester S. Spatt, Payment For Order Flow and Asset Choice (Mar. 2022) at 27 (hereinafter “Ernst”); see also Staff Report on Equity and Options Market Structure Conditions in Early 2021 (October 14, 2021) at n. 37 (“Consolidators may be affiliated with, or have an arrangement with, an options market maker. Options exchanges offer consolidators the ability to “direct” orders to an affiliated market maker, and the market maker gets a guaranteed allocation (e.g., 40%) if they are quoting at the best price.”).

[41] Ernst at 40.

[42] Order Competition Rule, Release No. 34-96495 (Dec. 14, 2022).

[43] See Terrence Hendershott, Saad Khan, Ryan Riordan, Option Auctions (May 18, 2022) at 7 (hereinafter “Hendershott”).

[44] Id.

[45] Id.

[46] Id.

[47] Ernst at 27.

[48] See 17 CFR §242.605; Disclosure of Order Execution Information, Release No. 34-96493 (Dec. 14, 2022).

[49] Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders, Release No. 34-96494 (Dec. 14, 2022). Under the proposal, stocks with a minimum tick size of 0.1 cents tick would have an access fee cap of 5 mils ($0.0005).

[50] See CBOE, Cboe Options Exchange Fee Schedule (Mar. 21, 2023). Fees are generally listed on a per-contract basis; $1.00 per contract is equivalent to 100 mils per share.

[51] See Proposed Amendments to Rule 610 of Regulation NMS, Release No. 34-61902 (Apr. 14, 2010).

[52] Id.

[53] See, e.g., Tim de Silva, Kevin Smith, Eric C. So, Losing is Optional: Retail Option Trading and Earnings Announcement Volatility (Mar. 29, 2022).

[54] See, e.g., FINRA, FINRA Orders Record Financial Penalties Against Robinhood Financial LLC (Jun. 30, 2021) (fine levied on broker-dealer for “thousands of customers…approved to trade options even when it was not appropriate for the customers to do so.”).

[55] Commissioner Caroline A. Crenshaw, Statement on Retail Options (March 17, 2023).

[56] I am also thinking about the implications of this phenomenon more broadly, particularly the potential for systemic consequences where increased numbers of retail investors are using leveraged investment strategies subject to margin calls that they may not be able to meet. See Commissioner Caroline A. Crenshaw, Assessing the Unknown (Sept. 24, 2021). Additionally, I am considering the potential risks associated with the growth of risky short-term strategies like zero-day-to-expiration options, in particular where options on individual equities may offer expiration dates outside the normal cycle.

[57] See, e.g., Bessembinder at 2 (“In general, fixed-income trading has been the focus of less research attention as compared to equity market trading, despite the fact that fixed-income markets are substantially larger and account for more capital raising as compared to equity markets”); Hendershott at 24 (“The literature on the structure of electronic trading in the options market is limited.”).

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